Business Forecast 2011
The outlook for businesses and families in developed economies worsens as governments tighten their spending. Can investors escape the squeeze next year?Equities are already a mixed bag, suggesting that markets are reacting to the uncomfortable reality that most of the strength from the lows of two years ago has been due to a rebound from excessive pessimism and unrepeatable one-offs – rebuilding of inventories, savage cost-cutting and record-low interest rates.
Bonds have been hammered by panic attacks over the sovereign bonds of profligate minor nations, the longer-term consequences of money printing, and policy discord among the bosses of the Eurozone.
Only commodities have remained buoyant, driven by sustained demand growth for energy resources and industrial materials from emerging economies, and the expanding popularity of precious metals as investment assets.
The outlook for 2011 is discomforting:
• In the US policymaking is likely to be paralyzed by political disagreement, with a fiscal squeeze produced by the expiration of the stimulus package and the legal straitjacket requiring states to balance their books. High unemployment continues to weigh heavily on consumer demand, while much of the business community remains cautious about expanding because of tax and other uncertainties.
• In China the government is set to continue with cautious tightening for a while yet, to restrain inflation in both consumer items and residential property, and rein back public-sector spending.
• In Europe it will be increasingly difficult to cope with a combination of fiscal austerity, periodic financial scares and intensifying currency competition.
Nevertheless…
• Emerging economies are continuing to grow strongly; in fact they are delivering about half the growth of the global economy. This means that even with sluggishness in the developed economies, the world as a whole will continue to grow.
• The markets will remain awash with nearly-free money and abundant credit for the big boys to use for their taxpayer-financed and -guaranteed speculative activities. Financial companies still account for an amazing 60 per cent of corporate profits in the US!
• Although there is nervousness in the bond markets about higher-risk securities, there is no sign of weakness in the solid sovereigns and corporates – nor is it likely to emerge while inflation in the developed economies stays away.
• Equity valuations are generally regarded as moderate, so they seem to reflect expectations of moderate earnings growth rather than any fear of a bust. Fund manager GTI says that Corporate America, with cash holdings of more than $2 trillion and a similarly large annual cash flow, “has a stronger balance sheet than at any point since 1956,” and points out that 185 Dow companies raised their dividends this year and only three cut them.
Unless there is an unlikely disaster such as the outbreak of a serious shooting war, or a financial crisis in Europe, where banks are loaded with toxic debt, it seems to me that 2011 will be an indifferent year for investors.
I expect it to be marked by a rebound in the dollar, a significant but moderate correction in precious metals and other commodities, little movement in bonds, some positive strength in equities generally (especially solid high-yielders) – and probably the start of a renewed bull market in China-related stocks before the end of the year.
CopyRight – OnTarget by Martin Spring
