Investors should opt for U.S. Treasurys and gold because the boost to risky assets from central bank stimulus measures may already be over, according to a report by macroeconomic research firm Capital Economics.
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The report authors, led by Managing Director Roger Bootle, said the Federal Reserve's third round of stimulus and the European Central Bank's (ECB) pledge to buy unlimited quantities of sovereign bonds were having little success in fuelling growth.
"The limitations of monetary policy have been underlined by continued weakness in Japan, despite a sixth increase in the Bank of Japan's asset purchase program," Bootle warned.
Bootle said the Fed's commitment to purchase $40 billion of mortgage-backed securities every month will substantially boost the U.S. monetary base, but might not generate faster growth of credit or the economy at large.
Meanwhile, the ECB's proposed bond-buying program fails to address the lack of competitiveness in southern European countries, which has contributed to weak growth and excessive debt, said Bootle.
Bootle added that he still expects the euro zone to disintegrate, with Greece and potentially one or two other small countries leaving the monetary union. According to him, the euro zone's economy will contract every year from 2012 to 2014, with a sharp fall of 2.5 percent in 2013.
Bootle said the gloomy economic picture, particularly in Europe, will benefit safe haven assets like U.S. Treasurys and gold, but prove to be bad for German Bunds and the Euro .
Capital Economics forecasts 10-year yields on U.S. Treasurys (and U.K. Gilts) will hover around 1.5 percent until the end of 2014, but German Bund yields will rise to 3 percent.
The report also predicted the S&P 500 will end both 2012 and 2013 at around 1,350 points, below the psychologically important 1,400 level. The index peaked in mid-September at 1,474.51 points.
"One reason we are skeptical the market will do better is that we think profit margins are set to come under pressure," said Bootle.
