Stock market ghosts of Christmas future
Dec 23, 2011
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Analysts at investment banks “traditionally celebrate the Christmas spirit” by predicting where major indices will end up at the end of next year, says James Mackintosh in the FT. Many of the forecasts appear to be made “after partaking of rather too much in the way of seasonal spirits”. Last year, for instance, Deutsche Bank was hoping for America’s S&P 500 to hit 1,550 by late 2011. It is currently at about 1,200. Last December, UBS pencilled in a FTSE 100 at 6,100 in late 2011. Its current level is approximately 5,400.
This year strategists are again broadly positive. Wall Street analysts are tipping an average rise in the S&P of 12% and some banks see strong rebounds in pan-European shares. HSBC and Morgan Stanley are among the least bullish, expecting the FTSE at the end of 2012 to be at 5,400 and 5,000 respectively.
Why is Morgan Stanley so cautious? Investors forget that we are “in a multi-year global deleveraging cycle”, says the bank. We’re gradually working off debt accrued during the credit bubble years. That means that growth is going to be subdued compared to the go-go years and vulnerable to setbacks.
What’s more, equities tend to be even more sensitive to growth expectations when the economy is no longer in a “debt supercycle”, as is the case now. So the recent market falls point to an impending recession in Europe and a sharp slowdown in Britain.
Pan-European earnings will defy the consensus by falling and stock prices will fall back. Moreover, valuations “are not overly cheap”.
The wild card in 2012, says Morgan Stanley, is the eurozone debt crisis. A messy break up would cause another financial crisis and “the Great Recession of 2008/2009 would pale in comparison to what would unfold”. Money printing by the European Central Bank would give stocks a boost, but this would rapidly dissipate as quantitative easing does little to boost medium-term growth.
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In the US, growth is set to be constrained by high unemployment, ongoing deleveraging and a slowdown in the rest of the world. Add all this up, and 2012 will be another year in which, “rather than the return from assets, it is the return of assets” that will be key, says Wayne Bowers of Northern Trust Global Investments. Defensive dividend-paying stocks on both sides of the Atlantic, which we have tipped regularly this year, are likely to remain highly sought-after.
When the stockmarket peaked in 2000, there were around 60,000 investment clubs in America, says Chris Taylor on Reuters.com. Now there are 5,500. Two major bear markets in the past decade have tarnished equities’ appeal: retail investors pulled $101.6bn out of stocks in 2011. New investment websites have made it easier for individual investors to research stocks. Another reason is a lack of cash. Disposable income per head has fallen by $1,459 since the second quarter of 2008.
Corporate Japan, with a cash pile of ¥70trn ($770bn) built up over two decades, has been on a record shopping spree this year, says The Economist. Taking advantage of the strong yen and beaten-down asset prices, Japanese firms spent a record $80bn on more than 600 foreign companies. Snapping up fast-growing emerging-market companies is allowing Japan to fill gaps in product lines and “internationalise” domestic industry “by the back door”.
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