2012: Turbulent year ahead for global stocks

At first glance, forward price-to-earnings multiples look reasonable, but Shiller PE ratios, which use 10-year averages of earnings, suggest that valuations in the emerging world are still lofty by historical standards.

Prices of petrochemicals are a leading indicator of the global economy—strengthening of crude prices in the second half of 2011 has not translated into higher petrochemicals prices. The price difference between Brent crude and Platts’ composite petrochemicals price index has narrowed to $330 from $580 at the start of 2011.

Across the 423 European corporates rated by S&P, aggregate free cash flow between 2007-2010 rose by 8% to ¤289bn. Cash on the balance sheet is up 33% to ¤637bn. Much of the cash is being held to fund companies’ own inventory during the next downturn.

Judged against the dollar, the euro needs to fall more than 10% just to get back to its low of last summer, even though risks of a disorderly break-up have intensified sharply since then. At $1.29, it is far stronger than its 1999 inception, when the euro’s founders intended it to trade at parity with the dollar. When the euro started, some former currencies were overvalued and others undervalued. Since then, inflation rates have differed. According to IMF, in Luxembourg a euro buys 99 cents’ worth of products, while in Slovenia an exchange rate of $1.53 is needed to maintain parity. Germany’s fair value has steadily risen, to about $1.20 (France is at $1.11).

However, not everything is

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