Since about mid-2010 much attention has been geared toward economic concerns in Europe, but now - over the coming three months and into 2013 - it is time to focus on the "shark closest to the boat" in terms of global growth: the US, according to Russ Koesterich, chief investment strategist at iShares.

Koesterich yesterday told journalists during a media briefing that while the fundamental and structural issues in Europe have yet to be addressed, through the implementation and announcement of the OMT - the European Central Bank's bond-buying plan - European politicians have been given some time. Indeed, "many things can still happen", he said, but there is arguably a bigger risk in the US, in the form of the fiscal cliff, as the world's largest economy may inadvertently push itself back into recession next year.

He highlighted how the fiscal drag facing the US is equivalent to roughly 5 per cent of its GDP (about $800 billion). It represents the aggregation of several decisions which were put off, while the bills of all the "proverbial cans that have been kicked down the road" - the Bush tax cuts in 2010 and the debt ceiling debate in 2011, for example - are coming through simultaneously.

Overall, he said: "When I look at the global economy, my expectation is that it can continue to grow in 2013 - albeit at a slow below-trend pace." (In the US that growth probably stands for about 2 per cent growth, while globally it means about 3.5 per cent, he said.)

"But the problem is that this economy is so weak and the recovery is relatively anaemic, that if there is any absorption of shock, this is likely to either push it back into a slower growth mode or into contraction," Koesterich continued. "And that is the risk that the fiscal cliff represents - it's this large amount of economic drag in the form of tax increases and spending cuts, and the intersection with an economy that already is growing very slowly."

Factors behind sluggish growth in the US

In looking at why the US economy is growing at such a slow pace, Koesterich noted how, typically, recessions draw to an end with more of a rebound. This recession, however, was "very different", for which he offered one particularly stand-out explanation. "The consumer - the engine of growth in the US, representing 70 per cent of all economic activity - had a debt level which was not only unsustainable, but also unprecedented," he said.

Between 1952 and 2008 household debt increased each quarter, but come 2007 it became unsustainable and since the third quarter of 2008 has been in decline. On the positive side, it's back down from its peak to about 109 per cent, but this is still "probably too high", Koesterich said. "Until you get the household sector back to a point where debt is more sustainable relative to income, consumption will be below trend, and so long as you have an economy which is largely based on consumption, overall economic growth will be below-trend as well."

Other headwinds hampering the US economy include a build-up of debt and demographics. In terms of the latter, while the US population has been ageing for some time, it is now "starting to bite", with the number of adults participating in the labour force continuing to drop (down from 67 per cent in 2000 to 63.6 per cent today). However, Koesterich acknowledged that all of this doesn't mean that the US has to go back into a recession. But, if you have a fiscal cliff, "you're probably going to suffer at least a mild recession in the first half of 2013", he said.

"You have the world's largest economy, you have what would represent the largest fiscal drag in US history, you have a weak economy, and - for a variety of reasons - you have most investors fairly assured this won't happen," he added, highlighting how investors seem to have become conditioned to expect last-minute compromises. This time round, however, things are going to be a bit more complicated.

As well as a much shorter timeframe, Koesterich noted that if you look at most of the polls it's not clear that either party is going to come out of this election with a very strong mandate. "And to state the incredibly obvious, the two parties have very different plans on how to address the fiscal crisis."

Europe

On the investment case for Europe, Stephen Cohen, head of investment strategies for Europe, the Middle East and Africa, said that "for investors who believe that Europe has avoided a crisis, the attraction of European equities is not hard to understand".

He continued: "We prefer equities in the more stable north, particularly German, Dutch and Norwegian stocks which appear undervalued relative to fundamentals. We remain underweight Spain and Italy, believing they are cheap for a reason. Taking a more aggressive position in southern Europe would depend on evidence of either faster growth or a lower risk premium. Both rest in the hands of the politicians."

Emerging markets are also forecast to constitute a much bigger part of portfolios, as investors look beyond traditional sources of income, which Cohen said they'll do either through corporate or sovereign markets in terms of EM debt, and via EM dividends.

Meanwhile, Koesterich argues that while reform is "politically difficult" - with investors likely to be "periodically frustrated along the way" - there are economic solutions to Europe's challenges. The European Union is solvent, he said - at least in aggregate. "By lowering bond yields the ECB has bought politicians time, but they must use this respite to address the structural flaws that hamper growth and leave the banking system at risk."