KUALA LUMPUR (Feb 3): Developed economies may fall into a mild recession in the first half of 2012 which may result in a hard landing for China, according to Standard Chartered Bank chief investment strategist Steve Brice.

He said volatility was likely to remain elevated, and that it was now a situation of ‘fragile West, resilient East’.

Brice said there was a 60% probability that investors would ‘muddle-through’ a mild recession in the West which will lead to a bumpy landing in the East.

Speaking at a media briefing on the 2012 first quarter outlook on Friday, Brice said that this scenario was based on the developments in Europe on addressing its structural weaknesses and the policy responses European central banks have taken, notably, the EU central banks’ decision to lend 200 billion euros to the International Monetary Fund to help resolve the crisis.

Also, positive developments in the US economy has in the past three months as oil prices have receded and the effects of the supply chain disruption following the Japan earthquake and tsunami receded too, he said.

However, Brice was sceptical this would be sustained as oil prices had started to move up as tensions between Iran and the US have been rising, adding that he expects oil prices to reach US$100 in the second half of this year.

However, Brice was cautious as fiscal policy is likely to contract in Q112 as some of the tax cuts and temporary spending increases expire.

He said it was also important to note that the Fed had already indicated that it would keep interest rates at zero percent not till mid-2013, but till 2014, an additional 18 months then previously intended.

Brice highlighted that this was a precursor to QE3 although he believe it was not a necessary option as the US still had a lot of challenges to deal with.

However, if QE3 does happen, Brice said it will be a positive for emerging markets including Malaysia as everytime a QE program runs, risk on or the risk taking by investors increases.

“We expect markets to rally as that was what happened after QE1 and into the run up to QE2,” he said.

As far as China was concerned, Brice said it was one of the better investment opportunities in the region as risks of a hard landing had already been priced in.  

The authorities in China, he said, had dealt with local debt challenges well, managed fiscal and monetary policies with a degree of flexibility and had increased government revenues.

The only issue left was for the government to start on a stimulus program.

Brice expects five reserve requirement rate cuts this year and for the first one to be in the next few months.

Standard Chartered’s favoured asset classes in this scenario was to be invested in high yield bonds, high yield equities and gold.