Deepanshu Bagchee: Asia-Pacific
1. China's housing market will correct.
The over-investment in housing will finally catch up with China, with property prices falling and many investors getting burned. Still, the correction will disappoint the doomsayers given that China's mortgage debt remains modest by Western standards. Banks will face higher non-performing loans because of the credit they have extended to developers. All in all, a housing correction — though painful — will be much needed to prevent an even bigger bubble, and China's government will announce policy measures to soften the housing correction.
2. Chinese stocks will outperform.
With the property market offering deadbeat returns, interest rates remaining low \(as the government tries to ease the pain of a housing correction\), investors will finally return to stocks. After a three-year slump, Chinese equities will rally as investors realize the virtue of buying into a market currently trading at just 11 times earnings.
3. Japanese bond yields will rise.
Japan's placid bond market will slowly awaken from a deep, deflation-induced slumber. With 95 percent of Japan's government bonds owned by domestic investors, the government has been able to pay just 1 percent on 10-year bonds, despite running a debt-to-GDP ratio of 200 percent. That will change in 2012, as politicians fail to bring the deficit under control and ratings agencies take further action. As domestic savings find other channels, bond investors will wise up and hedge funds will see an opportunity. Still, the rise in yields won't trigger a crisis given Japan's large current account surplus and large pool of domestic savings. But Japan's government will finally realize its finances are running on borrowed time.
4. India will face political and economic crises.
India's rising fiscal and current-account deficits and multi-billion dollar corruption scandalswill continue to take a toll on the economy. Inflationand interest rates will remain elevated, while growth will slow. Voters will show their disapproval for the ruling party in regional elections. The government will muddle along and the year could end with a new prime minister at the helm.