Investors should concentrate on US and UK equities as one way of adapting to the “new normal” conditions of a sluggish world economy, according to Merrill Lynch Wealth Management's 2012 Analysis.  

Despite a meagre growth prediction of 0.1 per cent in the US and a slump of 0.6 per cent in the UK, these regions offer the most attractive equities prospects, the firm says.

“In selecting equities in 2012, we are recommending a focus on large cap companies with strong cash flow and growing dividends,” said Bill O’Neill, chief investment officer at Merrill Lynch Wealth Management for Europe, the Middle East and Africa.

According to analysts, US large caps are the most reliable in terms of meeting earnings forecasts - consumer discretionary, consumer staples and information technology being singled out in particular.

With regards to fixed income, investors should opt for credit rather than sovereign debt, including both investment grade and high yield bonds, with a preference for US companies.

It is also likely that the US Federal Reserve will support the housing market to maintain flat rates until 2014 at the earliest, the firm said in an investment note.

Global growth, which will be lead by emerging markets, is expected to drop to 3.7 per cent from last year’s 3.9 per cent, although MLWM does not warn of a world recession next year. Only in Brazil is positive growth forecasted, with the firm predicting a rise from 3.1 per cent to 3.4 per cent.

In addition, the bank's wealth management analysis for 2012 anticipates a weaker euro, due to a more fragile economy overall, combined with the effects of seeing a more active European Central Bank.

The analysis also indicates that commercial real estate in the UK could help generate income opportunities as the polarisation between prime and good secondary property, as well as lower quality assets, continues.

Meanwhile, gold and oil - the UK’s strongest assets this year – are “unlikely to replicate these returns in 2012”. Despite low real interest rates, the strength of the US dollar is likely to hinder further performance, analysts said.