For now, the market seems inclined to give the Europeans the benefit of the doubt, and actions this week by the EU and the European Central Bank seem to have alleviated concerns about a crisis. That, say US analysts, is bullish, at least for the short-term. The Dow Jones Industrial Average jumped 186.56 points or 1.55 percent on Friday as US investors digested the news flow from the EU Summit.
For a year that has endured a Japanese triple whammy (tsunami, earthquake, nuclear disaster), a US credit rating downgrade and a full-blown European sovereign debt crisis, asset class returns in 2011 have been surprisingly resilient. As 2011 heads into the home stretch, performance anxiety among US money managers could very well spur a ‘Santa Claus’ rally.
Analysts say it is time for investors to dip their toes in the water and begin careful risk-taking as fears about a double-dip recession in the US and a catastrophe surrounding the euro debt crisis recede. Still, investors should expect another year of high-tension headlines and potential risks as Europe weathers a mild recession, US corporate earnings limp along, and China engineers a soft landing of its economy.
“We think equities will stay in a big, fat trading range next year, but expect roughly 10 percent upside from current levels,” Michael Hartnett, chief global equity strategist, Bank of America Merrill Lynch, said in an investor report released in New York on Friday.
“Deleveraging and slower earnings growth will limit upside. Quantitative easing (QE), valuations and positioning will limit downside,” added Hartnett. “Tighter fiscal policies in the US, Europe and Japan are likely to be offset by accommodative monetary policies around the world, aided by lower inflation. We expect fresh rounds of QE by mid-2012 in both the US and Europe. This will prove to be an important inflection point for financial markets.”
Although the bank’s strategists put a year-end 2012 target of 1,350 for the S&P 500, the climb will likely be rocky.
Bank of America Merrill Lynch was much more circumspect about the Indian stock market. “India has been the worst-performing market this year, falling one-third in dollar terms. Peaking inflation and the consequent pause in RBI rates are a positive, which will likely help the traditional December rally. However, we continue to expect a tough market over the next six months and foresee a correction of Sensex to 14,500 as growth concerns take center stage,” Jyotivardhan Jaipuria, head of research, Bank of America Merrill Lynch, wrote in a separate India-specific report released earlier.
Morgan Stanley believes the Indian market will make steady progress in 2012, which will be ‘marked by volatility’. The US brokerage expects a 16 percent upside for the BSE Sensex next year.
Foreign direct investment in India fell 31 percent to $24 billion last year even as investors flocked to developing nations as a group; in November alone, foreign investors pulled $661 million out of the Indian stock market. The drop in portfolio inflows and the widening fiscal deficit have been key factors behind the rupee’s sharp decline.
The good news is that although India has fallen out with the investment community, emerging market equity funds were net gainers of inflows for the fourth straight week. According to a recent report from EPFR Global, emerging market funds added $2.1 billion to their coffers, helped by Europe’s debt crisis. One can only hope that India, which relies heavily on portfolio inflows — foreign purchases of shares and bonds — as a means of covering its current account gap, will also get some loving from the attention being lavished on emerging market equity funds.
“Equities flows mirror what we see in the [mergers and acquisitions] space. Corporations have been building acquisition wish-lists for emerging markets,” Matt Lasov, director of global research at Frontier Strategy Group told The Wall Street Journal.
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