2012: Turbulent year ahead for global stocks

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Sunil Kewalramani: Jan 16 2012, 03:08 IST

grim. London Olympics 2012 should boost the UK economy. Almost £6billion of construction contracts have been awarded to British companies and double that amount could emerge from tourism, leisure, hospitality, retail and creative media. Euromonitor International has forecast 29.4 million overseas arrivals to the UK on the back of the Olympics, a 4% rise. US economic measures, such as consumer confidence, home sales and employment, are also pointing to improving fundamentals.

Meanwhile, China has started to ease monetary policy. The last time it did that, China’s excess liquidity fuelled 2009’s global rally in risk assets. In Europe, expectations could scarcely be lower. If the market can convince itself that the euro will survive, asset values could surge.

During the first half of the year, the central banks will try to infuse liquidity and this could cheer global stock markets from time to time. However, this could once again lead to higher commodity prices.

No sooner do central banks try to remove some stimulus towards the middle of 2012, we will see their respective economies decelerate again. This time, along with stock prices, we could see real estate being hit sharply, especially in emerging economies such as China and India, where they have held up reasonably well so far.

US Treasury yields have been in a steadily falling trend for 30 years. Unlike gold, Treasuries are still uncorrelated with commodities and stocks—if more stagnation awaits, US Treasury bonds will mitigate losses on a stock portfolio.

The S&P 500 price-to-earnings multiple, at around 13, might

... contd.

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