Year 2012 Holds a Lot of Promise for the Stock Markets

There are only a few more days left before we wave goodbye to a tumultuous year 2011 and cross over to year 2012, with much awaited hope and optimism. Indeed, there is much to hope for in the new year.

If history is anything to gauge from, I believe we are around six months away from a bull market. A typical bear market will last an average of about 9 - 18 months with an average 30% decline from its peak. From the highest point of 3313.61 on 9 Nov 2011 and currently standing at 2674.61 on 27 Dec 2011, we are slightly more than one year into the downtrend though the magnitude is only 19%. We believe the lowest STI can go should be at its support level of 2500 and not any lower. As a rule of thumb, the stock market is always forward-looking and usually move six months ahead of the economy. I firmly believe that those investors who are bold enough to buy into the low now will be rewarded handsomely later.

The rationale for optimism is not something airy-fairy. I believe the stock markets have taken into the worst-case scenario of a Eurozone recession and any bad news will be taken with good stride, notwithstanding a slight chance of another global crisis. Looking at some of the positive slew of data from U.S., I believe the economic superpower is in the course of a nice recovery into year 2012, alongside with China and other emerging countries. A Reuters' polls of economists shows that the U.S. will grow at a pace of 2.2% next year compared with zero growth in the Eurozone.

While China has been adversely affected by the plight of its largest trading partners, the European Union, we believe its huge internal consumption demand will still be the main driver of its GDP growth. I do not foresee any extreme measures undertaken by the Chinese government given the current investment climate and the declining property prices. On the other hand, though the depreciating rupee has caused some chaos this year, it is widely believed that India's central bank will ease their monetary policy to counter the slowdown in GDP growth. Lastly, Japan, another economic superpower, is also tipped to pick up in the fiscal year from April and should narrowly avoid a recession, according to a poll.

Moving forward into 2012, much is abounding in the stock market but it is only the fearless and the wise that will benefit. I wish all my readers a prosperous and blessed year of 'dragon'.

S&P threatens to Downgrade17 Eurozone Members - The Ultimatum

Patience for Standard & Poor's is wearing thin as it warned it may carry out an unprecedented mass downgrade of Eurozone countries, if EU leaders fail to deliver a convincing financial and political solutions on how to solve the region's debt crisis in a summit on Friday, according to Reuters.

It said ratings could be lowered by one notch for Austria, Belgium, Finland, Germany, the Netherlands and Luxembourg, and by up to two notches for the remaining nine placed under review, including currently AAA-rated France. Cyprus was already on downgrade watch and Greece already a 'junk' CC-rating.

President Nicolas Sarkozy and Chancellor Angela Merkel told reporters that their plan included automatic penalties for states that fail to keep deficits under control, and an early launch of a permanent bailout fund for euro states in distress. Whether this is good enough to resolve the crisis and restore investors’ confidence remains to be seen but any move of advancement are likely to bring cheer to all parties.

As the rating agency was widely criticised for their inertia during the Great Financial Crisis (GFC) in 2008, they would be adamant not to repeat the same mistake again by erring on the side of caution.

A Chinese Story: How China Plays Its Part in the European Crisis

Any hope that China will come as a white knight to the rescue of the European countries is dashed when Fu Ying, its Vice Foreign Minister, said that "China cannot use its US$3.2 trillion in foreign exchange reserves to save other countries". This is Beijing’s strongest rebuttal yet to the talk that they will bail out the European countries.

However, this crisis has provided a golden opportunity for the Chinese government to buy into any European quality names which is too good to miss. We believe that any bailout will come in the form of investment rather than purchase of bonds.

Despite the latest cut of its Required Reserve Requirement (RRR) by 50bps since 2008, the Chinese government reiterated that it is not their intention to loosen the property control but rather to help ease the liquidity problem in the economy. This signifies that China is still battling with its own set of problems, with high inflation and slowing economy their utmost concerns.

Bearing these in mind, Investors are therefore advised not to get carried away by the RRR rally and forget that the big global macro overhang remains, with the European crisis far from over.

The Day When The Global Markets Throw A Party...

The U.S. market surged 4% and closed at their day highs while the Germany's DAX surged 5% and paced an advance across the Eurozone.

This came after a coordinated effort by European Central Banks, the Bank of Japan, the Bank of Canada, and the Federal Reserve to pledge liquidity to troubled banks by increasing swap lines that allow additional dollars to flow through to the banking system. Effectively, it is now cheaper for the EU to get liquidity because the Fed cut rates on dollars they lend to EU banks in exchange for their currency. Interestingly, this came a day after S&P's downgrade of the major financial institutions and for the time being, alleviated the fear of another round of credit crunch.

China, on the other hand, lowered the bank reserve requirement ratio by 50bps for the first time since 2008. Despite their battle for inflation and asset bubble, they are concerned that a downfall of the Europe, one of its major trading partners, will have a drag on its economy.

 

So the fact that banks around the globe now should have an easier time of tapping short-term funding in the credit markets is encouraging. But this might not be the long sought after magic bullet solution. If the issue is one of solvency and not of liquidity, we are merely kicking the proverbial debt can a little further down the road before we will have to pick it up one day.

Just How Bad is the European Debt Crisis?

Poland has appealed to Germany, the European Union's most powerful economy, to show leadership and avert the collapse of the euro zone. He said the euro zone's sovereign debt crisis now posed the biggest threat to the prosperity and stability of Poland, which is outside the common currency but still hopes one day to join (Reuters).

"I demand of Germany that, for your own sake and for ours, you help it (the euro zone) survive and prosper. You know full well that nobody else can do it," said Sikorski, Poland’s Foreign Minister. 

Berlin has also come under heavy international pressure to allow the European Central Bank to embark on unrestricted purchases of stricken euro zone countries' sovereign debt through quantitative easing. Germany has so far strongly opposed both Eurobonds and a more active role for the ECB, citing fears that indebted countries would no longer have an incentive to reform their economies and also concerns about reigniting inflation. 

On the other hand, France’s credit rating may be put on negative watch just weeks after S&P published an erroneous message on France's AAA credit rating.  A French newspaper says the country's rating "might" soon be put on review for a potential downgrade by the firm (DJ).

It seems like the only good news for now is hope.

Two-Thirds Of Investors Expect Europe Recession - Barclays Capital

According to the results of a recent survey of nearly 1,000 investors conducted by Barclays Capital, "two thirds of investors think that Europe could slump into a recession in 2012 without either the U.S. or China accompanying it." Only 3.0% of those surveyed think the U.S. or China could slide into recession without Europe, "evidence that the majority of investors view recession fears in 2012 to be connected to Europe."

Most of the pessimism about Europe stems from concerns about the euro area sovereign-debt crisis, with concerns about elections and politics in advanced economies marking the second largest area of concern the survey shows. Barclays says "almost 50% of respondents expect at least one country to leave the euro area in 2012, with 35% of investors expecting the breakup to be limited to Greece only, and 1 in 20 expecting all five "peripheral" economies to exit next year."
 

Is Eurozone Already into Recession?

The situation in the Euro Area has taken a serious turn for the worse in the past month. The economy has tipped into what we believe to be a recession, which will only serve to widen budget deficits and weaken bank asset quality further. Policy makers are floundering to deal with this situation, amid very challenging economic and political constraints. The rest of the world looks on anxiously. Managing the global fallout from abrupt shrinkage in European bank balance sheets will be critical if an untimely re-tightening in global credit conditions is to be avoided.

Source: Institute of International Finance, Inc