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08-07-2010
What can we expect from equity markets in the second half of the year?
In our first editorial of the year we termed 2010 as "a year of transition". This referred to the fact that thanks to low interest rates and government stimulus packages the
economy would develop satisfactorily for the year as a whole, but that while the initial impact on stock markets would be positive, in the second half of the year rising
volatility would generate growing interest in high-quality shares. However, the anticipated nervousness appeared already at the end of April and continued though May, triggered by
the sudden escalation of the Greek crisis in reaction to politicians' unnecessarily tardy response to developments, causing the bill for the rescue package to balloon to an
astonishing EUR 110 billion. By comparison, in 2004 only about USD 30 billion was needed to stabilize Argentina, an economy bigger than Greece on every measure.
That said, the deterioration of the situation in Greece was not the only factor behind the stock market correction in May. As we know, stock markets generally anticipate economic
developments by six to nine months. We expect that global economic development in 2011 will be weaker than in this year. This means below-average, but still positive economic
growth. Why should growth slow next year? Most European governments have decided to consolidate their budgets as quickly as possible, with the result that there will be no further
promises of government spending to stimulate the economy. In the light of the debt crisis, government policies to reduce spending in the long term are certainly right. However, in
the interim this will weigh on economic growth, particularly as the economy is not yet robust enough. Typically, it takes several years to recover from an economic crisis
triggered by over indebtedness in the private sector; moreover, such crises are by their nature - their genetic code, as it were - deflationary. Furthermore, studies have shown
that when a country's public debt exceeds 90% of gross domestic product - which is likely to be the case in most countries in the coming years - the rate of economic growth
declines.
In this environment, we think that current earnings expectations - based on forecast earnings growth of about 20% in 2011 - priced into global equity prices are too high; growth
of about 10% seems more realistic. This prices equity markets at fair value, which leaves little room for generous returns in the coming months. Accordingly, we have weighted the
equity allocation in our portfolios as neutral. At the same time, volatility will remain high. Stock-picking plays a crucial role. Whereas in 2009 practically all stocks were
lifted by the rally, regardless of quality, now investors are increasingly focusing on selected high-quality value stocks backed by a robust, sustainable business model and, in
the case of European equities, export-oriented.
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Dr. Thomas Steinemann
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| Chief Strategist of the Vontobel Group |
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| +41 (0)58 283 78 44 |
| E-Mail |
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