Markets to improve as year unfolds
Posted by John Woodfield on January 6, 2012 | No Comments
John Woodfield, B.Comm, CFP, FMA, FCSI│Raymond James Ltd.
Financial Advisor
Suite 500 – 1726 Dolphin Ave., Kelowna, B.C., V1Y 9R9, Phone (250)979-2744
Markets to Improve as Year Unfolds
As we look ahead to 2012 the global economic backdrop remains uncertain, at least over the short term. The on‐going sovereign debt / banking crisis in Europe and fears that these events will drag down the global economy will continue to weigh on markets. But offsetting these concerns is mounting evidence that any economic slowdown will be contained to Europe with both the North American and the global emerging market economies showing signs of rebounding, though with tepid growth. Meanwhile monetary policy around the globe remains extraordinarily accommodative with interest rates hovering around historic low levels. On top of this corporate profitability remains strong with near record levels of cash flow.
While equity valuations are above cyclical trough levels they are attractive considering both the levels of profitability and interest rates. Provided the economic gloom emanating from Europe can be contained we remain positive on the outlook for equities for 2012. While volatility may remain elevated over the coming months as markets contend with European events we continue to favour stocks over bonds or cash at this stage of the economic cycle.
Overall the biggest risk for 2012 is the politicking amongst European policy makers. Efforts to stem the crisis have yet to provide the comprehensive solution markets seem to be clamouring for. Delays and half measures will likely push the region into recession in the early part of 2012. And a lack of clarity on how bailout funds will be allocated or to what extent and how active the European Central Bank will be will likely result in continued volatility in both the bond and equity markets. Having said this though we think the steps taken in Europe of late to combat the crisis are a step in the right direction. The expansion of the European Financial Stability Facility (plus other measures) to at least 10% of the region’s GDP together with measures to support the European banks should serve to alleviate the major risks in the region.
At the same time moves towards greater fiscal integration offer a solution to the long term sources of imbalances within the region. The biggest problem will be the delay between policy implementation and expected benefits. In the meantime markets will be focused on two issues: the ability of countries in the region (especially Spain and Italy) to refinance debt coming due this year at reasonable interest rates and the efforts of banks to access capital to shore up their balance sheets. Our view then is that we can expect volatility from the region to continue for the next several months but the risks of a major financial meltdown have been substantially reduced. We feel that for the most part these risks have been discounted by the markets and that the lows put in place last October will hold barring anything but a major policy misstep.
Filed Under: Real Estate Updates
