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What might 2007 hold for stocks?
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maxsyn
Veteran |
11-Dec-2006 00:04
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From BT:
WE'VE reached that time of year in which investors everywhere must surely be wondering what the New Year holds in store for stock markets. Coming at a time when the interlinked emotions of greed and fear are at all-time high levels, it makes the business of objective prediction all that much more difficult - greed drives everyone to keep predicting prices will keep rising while the fear lurking at the back of everyone's minds tells them that there is a slowdown to contend with, present prices are probably not supported by future earnings and markets everywhere are becoming increasingly vulnerable to setbacks. There is also another facet of fear, ie. fear of losing out. Anecdotal evidence from brokers is that retail clients have reached - or are close to reaching - their maximum frustration point over the past week. Angry at not having made enough money in the runup this year but yet worried at the levels at which they are contemplating their entries, many are turning to 'junk' to ease their frustrations. Thus it is that half cent and one cent counters are seeing massive daily volume, as are all those priced under 5 cents. Stock market apologists might defend this sort of activity as a sign of a healthy trading market but we suspect it speaks volumes about rising speculative froth more than anything else. As for what 2007 might offer, much depends on the US economic outlook and interest rate expectations. All analysts agree that the US will suffer a slowdown next year, but not all agree on how bad this might be and the consequent implications for interest rates. Perhaps the most bullish is BCA Research, which in its Friday Global Investment Strategy report said equity markets around the world are still cheap, that reratings in multiples should dominate and investment strategies should have a pro-equities, pro-growth bias. BCA's analysis is based on the 'soft landing' scenario, in which global economies - led by the US - enjoy moderate growth amidst low inflation, a scenario it says last played out in 1995-1996. It also looked at historical price-earnings trends and concluded that stocks are still a buy. (Investors who buy into BCA's 'history could repeat itself' argument should also be mindful of that other historical occurence ten years ago, namely the Asian currency crisis of 1997). In the not-so-bullish camp are the likes of UBS Investment Research (UBSIR) and BNP Paribas. In a Dec 4 Global Economic Perspectives report, UBSIR said it believes 2007 will be characterised by 'sub-trend global growth and ebbing profitability, with a shift in the composition of growth away from the US and away from consumer spending'. This cautious view is mainly because of the US. 'The conviction we have in the global view is strong. We have a high conviction for example, that US demand will become more handicapped by housing-related weakness over the months ahead, outcomes that are not, in our view, fully discounted by some US forecasters and policy makers'. BNP's Fixed Income unit in the meantime, said in a report entitled 'Hard Landing' that the US Fed will probably have to cut interest rates aggressively in the first quarter because of downside surprises to growth coming from a collapsing housing market. So much for the broad outlook for next year. The week ahead sees the US Federal Reserve conduct its periodic Open Markets Committee meeting on Tuesday at which it is expected to keep its federal funds rate fixed at 5.25 per cent. The local market should trade sideways until the meeting is over and done with, although property stocks could have to contend with residual selling left over from Friday, following the conclusion of the intergrated resort bidding saga. The one thing we can say for sure is that fear, greed and fear of being left out will continue to drive stocks more than ever before, making for a volatile week ahead. -- BT |
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