If you read the financial press over the next few weeks you will see raft of predictions on what is going to happen to global markets and economies in 2013.

Many of these predictions will be made with more confidence than a punter talking about Black Caviar running against a herd of donkeys. Most of these predictions will be wrong, but the law of large numbers says that at least some of these predictions will be right.

Here at Australian Stock Report we have been crunching the numbers, studying the charts, shaking our magic eight ball and reading tarot cards in an effort to get some insight into what might happen in 2013. All of this has led us to the following concrete conclusion… Drum-roll please… We have no idea.

Well not no idea, just no definitive idea. Any scenario we come up with is conditional on this or that, and has 42 little provisos built in. What we can provide are our thoughts on a few issues and drivers that could affect global markets and economies in 2013 and our thoughts on how they may play out.

The United States

The US has the largest impact on the global economy, given that they are the largest economy and consumer in world. The big issue stateside at the moment is the fiscal cliff. We see three main scenarios playing out:

1) Falling off the cliff – If the US economy did 'fall off the cliff', a US recession would be guaranteed and the follow-on effect to the global economy could be horrific, given its massive contribution to global demand. This scenario would likely lead to a bleak outlook for 2013.

2) Kicking the can down the road – This would mean that the politicians can't come up with a solution to the fiscal cliff issue so instead decide to continue tax cuts and leave spending unchanged (or some form of that). If this happens we can see 2013 being much like the last few months, with constant news reports on how the Republicans and Democrats don't agree on anything and markets responding to any new news on a deal being reached.

3) The fiscal cliff is averted – This is a scenario where the Republicans and Democrats agree on deal by the end of 2012. How this will affect 2013 will be dependent on the terms of the deal. How much will the deal stifle growth? Is this going to be scenario where US debt levels will return to a more sustainable trajectory? Ultimately this would be a good outcome for the US in the long-term and we think that if the market agrees, it could lead to a monster rally.

China

As the second largest economy and one of the fastest growing, China is a big contributor to the global economy. It has even more significance for Australia given China is by far the biggest buyer of our commodities. We are very bullish on China for 2013.

Over the last few years when Chinese economic growth has been slowing, we have struggled to understand why people were so worried. The Chinese authorities implemented a range of measures in an effort to slowdown the economy as they were rightly worried about the economy overheating. These measures worked and slowed down growth.

Then the country wanted to stimulate the economy and implemented a range of easing monetary policies, which are now beginning to show signs of working, with the latest reading from the PMI index showing the manufacturing sector re-entering expansionary territory.

Through the aforementioned actions, Chinese authorities have shown their aptitude for being able to successfully influence the speed of the country's growth.

We think that if Chinese authorities continue to ease monetary policy and its largest customer, the US, can at least avoid any period of negative growth; China's growth will start to accelerate. If this happens, commodity demand will pick up and Australia's mining sector will be one of the major benefactors.

Japan

Despite relinquishing the title of the world's second largest economy to China back in 2010, Japan is still major player on the world stage. The Japanese market has rallied close to 20% in the last few months on hopes that the Liberal Democratic Party (LDP) would win the country's election, and it did – in a landslide.

One of the major policies the LDP ran on was its desire to adopt very aggressive policies to beat deflation. One of these policies was to lower interest rates to effectively negative.

If the LDP does adopt these aggressive policies we can see the Japanese economy returning to if not is previous glory, then very close to it. Either way, any improvement will see Japan being an even more significant contributor to global growth and demand.

We do however, apply the same caveat to Japan as we did China, which is the US must at least avoid any period of negative growth.

Eurozone

The eurozone is complicated mess of 17 countries, many of whom have significant debt burdens that dominated global markets' attention for the better part of 2012.

For 2013, we don't see Greece being in the headlines too much. The country still has debt issues but bailout funds should keep the country rolling on. We think Spain and possibly Italy are going to be headline contenders in the eurozone contest of who can ask for the most bailout funds.

Spain has a head start at the moment as it has already taken bailout funds for its struggling banks, but Italy could be the latecomer in 2013 with a debt to GDP ratio of over 120%, which is much higher than Spain's at less than 70%.

Overall we see the austerity measures being implemented by several eurozone nations keeping the region in recessionary territory for at least the first of 2013.

Demand out of the region has been very subdued over 2012 and our view is that is it likely to stay at current levels next year, maybe with some slight deterioration. Either way we don't see the eurozone dominating market sentiment in 2013 anywhere near the amount it did in 2012.

Australia

For Australia we see a good year for the economy and the market. We think this will be largely driven by an increase in China's demand for our commodities.

As events go, Australia has to call an election sometime before late November, 2013. If the party leaders stay as they are now Australians will have two choices for Prime Minister, current Prime Minister Julia Gillard or Opposition Leader Tony Abbot.

According to polling Ms Gillard is preferred over Mr Abbot, but Mr Abbot's coalition is well ahead of Ms Gillard's Labor government in a two-party preferred polling.

We don't know who will win the election, but what we do know is that some of the recent policies such as the resource super-profit tax and the carbon tax do nothing but fix short-term budget issues and add political risk to Australia, which makes it look less attractive to foreign investment.

Whichever party wins, there does need to be a focus on long-term stable growth instead of band-aid short-term solutions. We think that from a purely economic growth standpoint it's time to give the liberals a chance. Labor has had two terms to get it right, but over this period have implemented several policies that make Australia less competitive in the global marketplace.

Wildcards

There are always several wildcard events and players that crop up and take centre stage throughout the year. While these are almost impossible to predict we thought we'd give it a go.

Iran and the US - Tensions have been building between Iran and the US mainly in regards to Iran's nuclear ambitions. We think there is a chance of a war between the two nations, given that Iran's government has been given many chances on the issue and the US is getting a lot of pressure from ally Israel to make a stand. How this would look for the global economy is uncertain and is largely dependent on how other Muslim nations respond. One thing that would be almost guaranteed is that oil prices would skyrocket, as Iran is the world's fourth largest producer.

North Korea is the perennial wildcard player. The country has been making news headlines recently with the launch of a satellite breaking international law. It is believed that the country is attempting to make a long range ballistic missile but who really knows what's going on in one of the most secretive and bleak places on earth. All we know is that they have the ability to destabilise the largest growth region in the world, which is never a comforting thought.

Our bests bets

Of the scenarios we have outlined, our picks for the most likely outcomes are outlined below;

For global markets we would expect markets to be up at least 10% by the end of the year, with Japan and Australia the outperformers.

Final thoughts

There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know. – Donald Rumsfeld

Despite the inelegant wording by Mr Rumsfeld, his words are a good way to describe financial predictions. The known unknowns are what we have discussed; these are events that we know will transpire, but don't know the outcomes.

The unknown unknowns are events that are unexpected to a majority. It's these unknown unknowns which are more or less unpredictable that can cause chaos on global markets. Just remember to take all the predictions for what they are, best guesses and nothing more.

2013 Financial Market Predictions is a post from: Australian Stock Report Market Pulse Blog