After the volatility of 2011, forecasting has become a dicey business. A panel of experts at Prudential’s 2012 Global Economic and Retirement Outlook briefing today in Manhattan offered some tentative reasons to believe that better days are ahead, but cautioned that turbulence will persist this year.
Stock prices are “more likely to surprise on the upside,” said Ed Keon, managing director at asset manager Quantitative Management Associates. He expects prices to grow by high single digits; the market knows the risks better this year and has embedded them in its price calculations. And while sovereign debt problems persist in Europe, Keon thinks the European Union will hold together out of self-interest. Germany in particular has a strong stake in the status quo, he said; half of its GDP comes from exports (compared to 10 percent in the United States), and 60 percent of those exports go to the Eurozone. “It’s very much in Germany’s self-interest to maintain the euro, and I suspect they will, if they’re telling the truth, do whatever it takes to preserve the euro.”
The global markets will remain under the shadow of the eurodebt crisis this year, said John Praveen, managing director and chief investment strategist for Prudential International Investments Advisers. “It seems they have not been able to come up with a gamechanger to solve the problem, so we’re going to see this problem fester on during the year. Markets are going to test the resolve of the policymakers to defend the euro and to prevent sovereign defaults,” he said. Some smaller nations are in recession, banks are under pressure because of higher capital requirements and the haircuts they took on sovereign debt holdings, and business confidence is struggling. Praveen expects a broader European recession for several quarters this year, which will complicate a resolution of the debt crisis.
Elsewhere in the world, Praveen said, Japan can expect modest growth that’s limited by the strong yen; emerging markets will see weaker growth because of pressure on their exports and higher borrowing costs. The good news is lower inflation in both the developed world and emerging markets because of reduced food and commodity prices. That means central banks can cut interest rates, he said. Equity valuations are attractive, which, coupled with lower interest rates, should boost multiples; he sees earnings of 8 to 10 percent.
Michael Lillard, chief investment officer for Prudential Fixed Income Management, sees GDP in the U.S. of just 2 percent, with a very slow reduction in unemployment. He doesn’t like government debt in the developed world; too much supply, unattractively low yields, and rising debt-to-GDP ratios that will lead to debt downgrades. Lillard sees better quality debt in the credit markets, where businesses have been conservative with balance sheets and are reducing debt.
“We are in a secular bear market, and what we are hoping for this year is another cyclical bull run within that secular bear market. Until then, you cannot fall in love with any part of the equity market, or any part of any markets,” said Quincy Krosby, chief market strategist for Prudential Annuities. She sees the likelihood of a third round of quantitative easing by the Federal Reserve, probably focusing this time on mortgage-backed securities. The Fed will act if the U.S. markets begin to struggle because of the strength of the dollar against the weakening euro, she said. The dollar’s strength will test U.S. companies. “I do think we will find an equilibrium where the U.S. market can do well, but only if U.S. economic data continues to gain strength,” she said. If Treasury yields rise with equities and the stronger dollar, that would be a sign that the domestic economic expansion is real, Krosby added.
“For us, the market must be hedged. You cannot be in this market in the first half of 2012 without a hedge,” she said. “This will be a year of risky business.”