Outlook for the next six months
Analysts are looking for eurozone leaders to continue taking baby steps toward meaningful structural change As the election nears, the tenuous fiscal cliff on which the U.S. perches will gain in importance Macro headlines, that is bad news about the eco
The tumultuous and too often torturous first half of 2012 has come to a close and that’s likely just fine with equity investors. While the global economic risks that have recently rattled stock markets are expected to persist, there is growing confidence that the steep losses endured in recent months will give way to modest gains from now to the end of the year.
“Caution is the watchword,” said Savita Subramanian, U.S. equity strategist at Bank of America Merrill Lynch. “But equities may have more reason to appreciate than fall further.”
Entering 2012, market conditions were far different from today. Europe’s ongoing crisis seemed to be improving, the U.S. economy looked to be turning a corner and China’s soft landing appeared to be on schedule. Evidence of investor confidence was borne out by a rise on the MSCI world index of global equities. A rally that had begun in October 2011 extended through the first two and half months of the year with a climb of just under 12%.
Since then, however, sentiment about the strength of the global economy has dramatically deteriorated and global equities have plummeted more than 9%, wiping out almost all of the gains earlier this year.
The S&P/TSX composite index has been one of the hardest-hit benchmarks, falling 11% since February and 7% year to date. The S&P 500 has fared much better by comparison, gaining 4% in the first half
despite a 7% loss since early April.
Paul Taylor, chief investment officer at BMO Harris Private Banking, said the macroeconomic risks markets have struggled with in recent months will continue to haunt investors in the second half of the year, but he remains optimistic that equity markets will end the year higher than they are now.
“Presumably the eurozone will inch towards more significant structural change in terms of debt mutualization, a single banking regulator and greater fiscal integration, but it will continue to be very slow steps and credit conditions will continue to be a cloud over markets,” he said.
“The other big risk is the U.S. fiscal cliff debate, which will continue to build as we get into the heart of the U.S. presidential election.”
But despite these considerable challenges, Mr. Taylor is confident policymakers will take the necessary steps needed to deal with the global economy’s myriad problems.
He also believes that while annualized GDP growth in Canada and the U.S. is expected to remain moderate at 1.5% to 2.25%, corporate earnings on both sides of the border will climb 5% to 8% in the next two quarters, resulting in average returns in the mid-to-high single digits for stocks listed on the TSX and S&P 500. That falls short of the doubledigit rally that occurred in the last few months of 2011, but would bring most investors back into the black for the year if it happens.
Mr. Taylor’s cautious enthusiasm is echoed by Canadian investment
managers in a recent survey conducted by Russell Investment Canada Ltd. Almost 90% of those polled see headline macro risk as one of the greatest challenges. At the same time, 70% of investment managers are bullish on Canadian equities, compared to 56% in the first quarter and only 43% a year ago at this time.
“The selloff in April and May has improved valuations and that has led to increased bullishness in Canadian stocks,” said Greg Nott, chief investment officer at Russell Investments Canada. “In addition, despite gaining in the first quarter, Canadian equities lagged their global counterparts in that period, making their relative valuations even more attractive.”
Sentiment about U.S. equities is also generally more positive, according to the Russell survey, but Canad-
ian investors remain cautious about stocks in Europe, the Far East and emerging markets.
“Investors who had expected emerging markets to continue performing better than developed markets may have been disappointed by the Russell emerging markets index’s 19% decline in 2011,” Mr. Nott said.
Investors south of the border, by comparison, appear to be far less optimistic. Benchmark allocations for equities have plummeted to 50% from historical averages near 60%, reports a Bank of America Merrill Lynch poll of U.S. equity strategists.
Ms. Subramanian said this represents a level of bearish sentiment not seen since the mid- to late-1990s. Perhaps paradoxically, she considers this deep lack of confidence as a promising sign for stocks and ex-
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