Now is not the time to get too excited about stocks
The Eurozone sovereign debt crisis is likely to be the biggest risk factor that investors have to deal with in 2012. Financial markets will be driven by the uncertainty related to its political and economic challenges. This is the analysis made by Giorgio Cortiana, Managing Director of Wealth Management Research at UBS. In his economic and market outlook 2012, he predicts the first months of 2012 to be a minefield.
The big question for the months and years to come is : who will pay for the public debts of the Eurozone, the US and Japan? “It’s not easy finding a solution”, says Giorgio Cortiana, “knowing that the sovereign debt level in some major economies is alarming”. The UBS wealth management specialist gets the impression that we are in a post-financial crisis phase rather than in a post-recession one. He predicts that we will have to get used to less economic growth than in the past. As debt and refinancing will also dominate 2012, he expects huge competition between economies to find creditors.
Hunting for curriences to invest in looks a lot like the myth of Sisyphus. Why? Because the countries with a surplus in their current account balance averages between 2006 and 2010 only represent 10% of the total currencies traded. “You only have a limited number of choices. You can invest in Scandinavian currencies, or in the emerging markets, but these currencies are not very liquid”. Giorgio Cortiana adds that you cannot put all the planet’s money into 10% of the currencies traded. To put another way: UBS notes that the majority (about 90%) of the currencies market is in a bad shape, but liquid.
Justice for all
Mr Cortiana named another issue with emerging markets. Though they account for 70% of the global economic growth, they only represent 12% of market capitalisations. There are several explanations for this imbalance, according to him, “There are only a limited number of companies listed on the stock exchanges stemming from emerging countries. China, the second largest economy in the world, accounts for only 2% of global market capitalisations. Two thirds of the world lives in a system where the flows of capital are not liberalised”. Though there is an imbalance in economic power Giorgio Cortiana is convinced that there will be a convergence of financial and economic impacts someday.
During his presentation, Giorgio Cortiana emphasised several times that now is not the moment to get too optimistic. Repackaging debt will not make it disappear. What’s more, according to UBS, the fact is that all the rescue plans so far have fallen short of what would be needed to end the crisis. Last but not least, the Swiss bank estimates the money needed (over 300 billion euros) to stabilise European Banks is three times the amount allocated in Brussels in October 2011.
Paris testing its relationship with Berlin
The Eurozone has chosen the austerity path and is currently heading back into recession. Highly indebted countries such as Portugal and Greece are working hard to implement the strict austerity measures imposed on them. Giorgio Cortiana wonders if the measures implement at the moment will still be in place in a few months. Countries like Greece, Portugal, Italy and Ireland are in a recession, and France is in high risk of being there soon too. “Markets will be watching the polls before the French elections closely in April and May 2012. One major question that interests investors is whether President Sarkozy’s problems will benefit the far right". Mr Cortiana predicts a more strained relationship between Paris and Berlin if the French right wing party Front National should make it into the second round.
To sum up, UBS argues that it is too early to be optimistic about buying stocks. And if you dare to do so, choose to invest into large caps, the Swiss bank experts advise. Small- and medium-sized entreprises are too risky, USB says, because they are largely affected by the deleveraging effects of banks reducing their activities and being more reluctant to give credits to SMEs. CW