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发帖数: 146 | 1 Bullish outlook on European and emerging market stocks, as well as
commodities.
By Jurrien Timmer, co-manager of Fidelity Global Strategies Fund, Fidelity
Viewpoints – 12/19/2012
It has been a year of confusion, of tail risks anticipated and averted,
fiscal cliffs, and quantitative easing (QE). It has been a year of a housing
recovery in the United States and a growth recession in China. It has been
a year when the eurozone stared into the abyss. It has been a year of an
against-all-odds rally in stocks. As 2012 comes to a close and I look ahead
to next year, here are four investment themes for 2013.
1. Fiscal austerity and a fiscal cliff resolution in the United States
The fiscal cliff debate in the United States is serving as a catalyst for a
much larger conversation concerning fiscal austerity. The credit crisis in
2008 forced households to stop living beyond their means, but this private
sector austerity was offset by fiscal stimulus and monetary policy. That has
kept the economy afloat these past four years. The fiscal cliff, however,
may force the government to reduce its deficits, which could cause a
considerable drag on the economy going forward. The housing sector is in a
strong rebound, but corporate America curtailed its business activity
starting in the third quarter because of the uncertainty surrounding the
cliff. The big question is whether any resolution by Congress will prompt
companies to start spending again. If so, any upcoming fiscal drag could be
at least partially offset by an increase in capital spending and hiring, as
well as by the ongoing housing recovery.
But first the fiscal cliff has to be resolved. The best-case scenario for
the markets would be a so-called grand bargain that addresses long-term
deficit reduction and tax reform. That could likely be very bullish for risk
assets. But reforming the entire tax code and overhauling Medicare could
take months and there simply isn’t enough time to do it all before year end.
The worst-case scenario for the markets would be going over the cliff
permanently. That could create an enormous fiscal drag for the economy and
would likely cause a recession. It’s hard to imagine Washington letting
that happen, knowing what the consequences would be. The irony is that going
over the cliff cold-turkey wouldn’t even solve our entitlement issues,
because the cuts would mostly affect discretionary spending.
Or there could be something in the middle—an eleventh-hour compromise that
cuts some spending and raises some taxes, with a promise to do more down the
road. If that were the case, the stock market should respond favorably, but
it remains to be seen how sustained a rally would be, given that the
country’s fiscal problems would only get kicked down the road.
The main question regarding an eleventh-hour deal is whether it gets done
before year-end or in the new year, when a new Congress takes office and we
get closer to the debt ceiling. If it’s the latter, there is significant
risk of a market correction in the weeks ahead, although, ultimately, I
would expect a deal in the new year to be similar to one before year-end.
If we do get a middle-of-the-road compromise, the big question will be the
response from corporate America. Will such a deal be seen as a down payment
for more to come, and therefore as a sign for companies to start investing
again? Or will CEOs ask, “Is that all?” and continue to withhold spending,
and to deploy their cash flow to buy back shares rather than build
factories and hire workers? This remains one of the key questions, and right
now nobody has the answer.
2. Nowhere else for the Fed to go?
It appears that the Fed might have reached the point of diminishing returns
from QE, creating the risk that the central bank will not be able to further
boost asset prices when it needs to. The S&P 500® Index did not respond
favorably to the last announcement of another round of QE, as it had after
previous QE installments.
More importantly, the Fed could be left without any easing tools should the
economy contract before it has had a chance to normalize policy. This has
always been my worst fear—that if the United States goes back into
recession, policymakers will have neither the fiscal nor the monetary tools
to smooth things out. Fortunately, I don’t think a recession is imminent.
The other extreme is that at some point, the U.S. economy will recover to
such a degree that inflation will become a problem. If that happens, it
remains to be seen whether the Fed will be willing or able to shrink its
ever-expanding balance sheet in time to contain inflationary expectations.
This is the biggest long-term risk as I see it, although I think it is far
from imminent.
3. European stocks on an upward path
In retrospect, the June bottom in European stocks looks like it was an early
-cycle low, and this creates a constructive backdrop for market leadership
as we head into 2013. I break the market cycle into four phases: the early
cycle, when the economy is bad but getting less bad; the midcycle, when
things are good and getting better; the late cycle, when things are good but
losing momentum; and the down cycle, when things are bad and getting worse.
In the spring of 2009, U.S. stocks formed a textbook early-cycle low on the
basis of four factors: the economy bottomed out (i.e., things were getting
less bad); the Fed stepped up its monetary response with QE1; valuations
were very cheap (the forward P/E was only nine times earnings), and the
technicals were oversold. That was a winning combination back then (leading
to a 100% rally after the S&P low on March 9, 2009).
Looking back to last summer, one could argue that all four of these
conditions were met as of the June 4 low for European stocks. If that is
correct (and it really is too soon to know for sure), then European stocks
could continue to rally and even outperform the global stock market into
2013, as the QE1 analog suggests.
4. China on the road to recovery
China’s economy is showing clear signs of recovery. For instance, the chart
below shows the increase in the freight traffic in China, and the Chinese
stock market. This could provide a tailwind for the global economy during at
least the first half of 2013. For most of 2012, China has been in what can
best be described as a growth recession (i.e., growing well below potential)
, and this has caused a major headwind for global growth and, therefore, U.S
. earnings. Now, with the new political leadership being installed, it
appears that the Chinese economy has bottomed and is in the process of
undergoing yet another liquidity-fueled acceleration. This should be enough
to turn the headwinds into tailwinds for a while, and that should benefit
global growth (especially in emerging markets) and U.S. earnings.
A caveat: The current rebound appears to be driven less by traditional bank
lending and more by what is called shadow bank lending. Shadow lending
occurs when banks and third party lenders collect household savings and
package them up as high-yielding wealth management products (WMPs). WMPs are
basically pools of loans that are repackaged into investment vehicles. They
offer higher yields than bank deposits, and are often more speculative and
therefore more risky. Chinese households have been flocking to WMPs because
they are starved for yield in a country where bank deposits don’t yield
much and where the local stock market has been a disappointment.
The bottom line is that China is likely to be a global tailwind for a while
(perhaps several quarters), but that this growth will be of “poor quality”
and therefore unsustainable.
These are the four themes as I see them, at least going into the first half
of 2013. Beyond the next six months, I don’t think there’s enough clarity
to make a call.
Investment implications
Based on the assumption that the fiscal cliff is resolved, I expect risk
assets such as stocks, corporate bonds and commodities to perform reasonably
well into the first quarter and perhaps beyond. Treasury yields could rise
modestly and the dollar could edge lower as risk appetites return.
Looking globally, my sense is that the performance leadership will come from
European and especially emerging market stocks for a while. The U.S. stock
market was the go-to place for investors during the first half of 2012, but
since the June low the relative strength has come from European stocks. That
relative strength has continued in recent weeks, even as U.S. stocks have
corrected. Indeed, the MSCI Europe Index (MXEU) shows a very bullish pattern
that is breaking out from a months-long consolidation. Emerging market
stocks have languished since the fall of 2010 as global liquidity has dried
up. But that could now reverse as China reaccelerates and Europe stabilizes,
which may bode well for emerging market stocks.
Bonds don’t seem very interesting here, but should be considered for their
income and diversification benefits. High-yield investments such as high-
yield bonds, emerging market debt, and U.S. bank loans could be decent
performers, but, in my view, these sectors seem fully valued now on an
absolute basis. |
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