WALL Street investment bank Goldman Sachs, one of the world's biggest commodity trading firms, has issued its predictions for 2012 as markets brace themselves for a new year slump.

Goldman is predicting the FTSE 100 in London will plunge in the first three months of 2012, before recovering 1,100 points by the end of the year to hit 5,800. The bank's 2012 Europe forecast, entitled Despair into Hope , hedges its bets about what lies in store, but the central message is one of cautious optimism.

Goldman expects the FTSE 100 to hit a low of 4,700 before staging a gradual recovery in the second half of the year — but all bets are off if the euro falls apart. The bank says: “Our economic forecasts assume some resolution to the eurozone debt crisis in the next few months. But the chances of a more chaotic outcome, in particular a break-up of the euro, although still small, have grown.”

Goldman's economists expect eurozone GDP to contract by 0.8 per cent in 2012, with a short-lived recession in Germany and France, and a longer and much deeper one in the peripheral eurozone countries.

“But if a political breakthrough is not achieved before the refunding cycle picks up in earnest in mid-January, the probability of [the European economy] spiralling out of control towards a break-up would substantially increase,” it said.

The bank is predicting a rally in equities in 2012, with the trigger likely to be a better resolution of eurozone problems — one that could involve “an agreement between Germany and France on how to [manage] the debt burden”.

The main European indices should rise 10 per cent from current levels, implying a sharp rebound as the markets make the transition 'from despair to hope'.

But the timing of this rebound, however, is very difficult to predict because it is likely to be partly dependent on policy developments and political decisions which could accelerate or delay a recovery.

“Overall, though, a volatile market, with little overall change, what we describe as 'fat and flat', would be our central view for the year as a whole, but with things getting worse before they get better,” Goldman said. So what else is in store for 2012?

In May 2008 Goldman forecast that the oil price would climb to $200 a barrel. It got to $150, but the price fell back sharply after Lehman Brothers folded in 2008. After starting 2011 at $95 a barrel, Goldman now forecasts an average Brent crude oil price of $120 (up 15 per cent on the current price) — rising to $130 in 2013.

Miner BHP Billiton and Rolls-Royce are among firms on the bank's 'conviction buy' list. Goldman is also backing the following sectors for growth: oil and gas, healthcare, telecoms, personal care and household goods. It is less keen on financials, construction and materials, financial services, industrials, retail, travel and leisure.

For US stocks, the bank named 10 consumer companies with considerable potential, including Coca-Cola, Nike, General Mills, McDonald's, Dick's Sporting Goods and Comcast.

European banks, which collectively plan to reduce their balance sheets by around one trillion euros and have approximately 750 billion euros of debt to refinance in 2012 should be avoided.

US-based banks could benefit by seizing market share with Citigroup, JP Morgan and State Street among the best positioned. — The Guardian, London