Who Will Prosper in 2012

Some lucky folks will benefit from problems in Europe and the sixth year of the housing bust.

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Nobody's predicting boils or locusts, but there certainly are a lot of things that could go wrong in 2012.

The most prominent worry is a financial meltdown in Europe that's dramatically worse than the 2008 Lehman Brothers bankruptcy, which could trigger the second global recession in five years. Another event on the doomsayers' calendar: some kind of military confrontation with Iran, meant to halt the bellicose nation's nuclear program. Since Iran is the world's third-largest crude-oil exporter, a showdown there could be far more disruptive than the 2011 Libyan war, which helped drive oil prices above $110 per barrel, and gas prices to nearly $4 per gallon.

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There's a property bubble in China that might deflate gradually, but might also explode like the U.S. housing bubble did in 2008. Less-catastrophic worries include further downgrades of the U.S. credit rating and the usual insanities of an American election year, which seem to render effective policymaking impossible. Meanwhile, the U.S. housing bust will grind on and the stutter-step economic "recovery" will continue to feel like a recession to many.

For some people, however, there will be good news in all of this. Plus, overwrought fears tend to produce relief rallies if the worst doesn't actually happen. If 2012 unfolds more or less as expected, here's who is likely to benefit:

Home buyers. If you've got a reliable job, money saved for a down payment, and a sound credit rating, the American Dream is banging on your door. A combination of depressed prices and record-low interest rates has already pushed home affordability to the best levels on record. Many buyers are sniffing for the bottom of the housing market, so they can buy at the lowest possible price. But it's worth keeping in mind that bottoms don't usually announce themselves in real time, and besides, people should buy a home for fundamental reasons—such as to live in—rather than hoping to buy low and sell high.

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Still, it does seem like prices may be close to bottoming out. Prices on average have fallen by more than 30 percent since 2006, and Moody's Analytics predicts they'll fall another 3 to 5 percent in 2012. Foreclosures will probably pick up as well, since many have been delayed as states investigate suspicious practices by banks. But prices and new construction could begin to recover in 2013, especially if the economy continues its slow but steady growth, without any further shocks. In healthier markets, prices may start to firm sooner. For those with the wherewithal to buy, the next year or so may be a unique window of opportunity.

Investors with a high tolerance for drama. Many stock-pickers think there will be some terrific buys in 2012—but it will take nerves of steel to pull the trigger. If the basic script in Europe plays out, the next crunch points will come in February, when Italy needs to start rolling over billions in debt, and March, when Greece is likely to need another dose of bailout money. Those are likely to be gut-check moments, when those troubled nations need to choose between bailout terms that feel like indentured servitude, or a highly risky go-it-alone strategy that could entail leaving the euro zone and returning to weak currencies like the drachma or lira. As the brinksmanship drags on, it will force up borrowing costs for those countries, roil the stock markets for the 50th (or is it the 100th?) time, and convince the squeamish that Armageddon is nigh.

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That moment of panic—and plunging prices—will represent the buying opportunity that shrewd investors are waiting for. They tend to believe that the imminent risk of a financial meltdown is the very thing that will force voters and politicians to make the tough concessions necessary to keep the euro zone intact. Most financiers also believe that the Federal Reserve and the European Central Bank will ride to the rescue, rather than standing by as the global economy collapses. Bank stocks in particular could end up a steal, as frantic sellers mistakenly anticipate the worst, driving prices into the basement. But profits may accrue only to those with the stomach to place their bets at what seems to be the darkest hour.

Big companies. They're poised to win whether there's another recession, or a breakout boom. Large-capitalization companies—those valued at more than $10 billion—have generally done an outstanding job over the last few years at cutting costs, paying down debt, building cash reserves, and diversifying their business all over the world. "Corporate balance sheets are in immaculate shape," Bank of America Merrill Lynch recently proclaimed in a 2012 forecast. Some big companies even benefit from rising oil prices, because they're in the energy business or they build equipment that helps other businesses reduce costs.

[See 12 ways to thrive in 2012.]

That doesn't mean big companies will be hiring a lot of people, but it does mean they're unlikely to announce major layoffs. Many of them have substantial operations in fast-growing emerging markets like China, India, and Brazil, which helps offset slow growth in Europe and the United States and sustain profitability. Employees of such companies should fare well in coming years, and shareholders able to ride out bumps in the broader economy could benefit too.

Stingy shoppers. After several trying years, 2011 turned out to be a rebound year for retailers, with total sales trending nearly 8 percent above 2010 levels. The problem is, incomes have risen by only half that much, which means many shoppers drew down their savings or pulled out the plastic to finance purchases. With Americans still carrying too much debt in general, 2012 could be another pullback year, as the mini-binge ends and families continue to repair their damaged balance sheets. That may bring a return of the deep discounts retailers have used in the past to draw shoppers. Consumers with little or no debt, and the self-discipline to say no, will be in the best position to capitalize on bargains.

[See why Europe's debt crisis is taking so long.]

Travelers to Europe. The weak economy in Europe seems likely to make the U.S. dollar stronger against the euro, which will make American goods more expensive to Europeans, but give the dollar more purchasing power in Europe. The euro has been falling in value against the dollar for several months, with one euro currently worth about $1.30. Nigel Gault, chief U.S. economist at forecasting firm IHS Global Insight says, that without a full-blown financial crisis in Europe, the dollar ought to strengthen to about $1.25. "If there is a crisis," he says, "the euro could easily go to parity with the dollar, or below." A 1-to-1 euro-to-dollar ratio would make the Old World the most affordable it's been to Americans since 2002. Europe may not seem like such a bad place after all.

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