One prediction I will make with confidence is that this year for investors in Australia will be better than 2011. Last year was one dominated by political posturing and procrastination that left global stock markets in a no man’s land.
Things will be different in 2012 and the news on Wednesday 21 December just before Christmas that Spanish bond yields had fallen significantly, the Dow Jones index was up over 300-points for most of the trading session, and the VIX – or fear index – had dropped 7% towards a reading of 23, makes me cautiously positive.
This underlines the fact that when the European Union (EU) and the European Central Bank (ECB) lift their game, then we can start taking tentative steps out of no-man’s land.
By the way, the market responded positively late last year to the ECB’s program that would give EU banks three-year loans at a low interest rate of 1%. This will help shore-up banks’ balance sheets and provide liquidity. Some analysts even argued that some banks would take the 1% money and buy sovereign bonds with it, and these are yielding rates a lot higher than 1%.
It’s getting better
As one guy put it, when it comes to Europe (with apologies to the Beatles) “it’s getting better all the time.” Sure it has been slower than most of us would have liked, but the potential precariousness of the situation for the global economy and markets means we are now seeing some better decisions from the people who count.
If Europe can come up with better decisions, it will add weight to optimism over the US economic recovery, where even the housing sector is starting to see some green shoots. Data from the US showed that housing starts and building permits rose sharply in November, reinforcing other economic data that showed builder sentiment and sale prices were both on the rise.
“Looking ahead to 2012, we believe residential investment will be a net positive to growth next year due to the two bright spots of the construction sector: multifamily building and renovations,” said Michelle Meyer, economist at Bank of America Merrill Lynch.
The GFC started with a housing problem and a full US economic recovery needs Americans to once again feel that investments in bricks and mortar are as ‘safe as houses’.
Recently, Nariman Behravesh, the chief economist at US-based IHS Global Insight, made his ten predictions for next year and this organisation is held in high regard when it comes to predictions. Let’s see what these guys are predicting and I’ll give my two-pence worth as well.
One
World economic growth will slow and Europe will determine how hard a landing China will have, which is slowing down faster than expected. I think Europe will do better than expected and China will turn it around; this will help the Shanghai Composite index, which has been nose-diving since May, and that will in turn help our economy as well as stocks.
Two
Asia will grow fairly strongly, around 5.5%, with Japan’s reconstruction spending helping to offset Europe’s recession impact.
Three
Emerging economies outside Europe will grow fairly well because they are more dependent on the US and China relative to those in Europe. This underlines the need to watch China closely.
Four
Commodity prices won’t plunge, but will more than likely move sideways. This should put a floor under the share prices of the likes of BHP-Billiton (BHP) and Rio Tinto (RIO).
Five
The outlook for inflation is benign — recession in Europe has some positive effects in this regard — and contained inflation, eventually, is good for stocks once the downside from the recession is factored in. By the way, some of the end of year share sell-offs were due to the expectations of a recession in Europe.
Six
Interest rates will be kept low worldwide and our own Reserve Bank of Australia (RBA) will cut rates early in the year, which will help our stocks as well.
Seven
Fiscal policy worldwide will be tighter, which will hit demand and keep a lid on growth. Overall, this will contain stock price potential, but against this, there will be a bounce back in shares if the European rescue plan gains credibility over the next few months.
Eight
The US dollar weakens against most currencies apart from the euro and if the EU crisis worsens, Nariman Behravesh argues we will see parity between the dollar and the euro. I don’t like currency predictions, but if the Europeans surprise us all, then the euro goes up, stocks go up and so does the Aussie dollar. Of course, the opposite applies.
Nine
Europe is at risk of creating a financial meltdown, which means we see a Lehman Brothers kind of market slump. I think the Europeans know this and the ECB would change its attitude and embark on a quantitative easing-style liquidity program.
Ten
China could have a problem with its real estate market and that would impact Asian growth and in turn hurt local as well as world growth. I still think this is a low order risk.
I would like to end my peering into my economic and market crystal ball by pointing out that a lot of history points to a massive upshot in share prices when the worst of Europe’s problems have passed us. Last year, I punted sanity and rationality prevailing in the EU — I got it wrong — but I don’t believe stupidity lasts forever.
By the way, I have always argued we would muddle through these problems and what we have seen and what we are seeing is what muddling looks like — sometimes up, sometimes down — but eventually we will break out and on a ten-year basis, stocks have a very good history of nice returns.
In the absence of anything better to rely on, I’m punting positively on history!
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