Despite concerns over global inflation, the struggling U.S. dollar and a potential bust in the commodities market, the U.S. and global stock markets should benefit from an economic “soft landing” in 2007 and are poised for further growth, said leading financial experts at the fifth annual Dow Jones Indexes/ STOXX Ltd. Global Economic Outlook.
“Goldilocks” Economy Looks Promising for Global Equities
“The global stock markets have been betting on the ‘Goldilocks’ economy, while the bond markets have taken a more pessimistic view. Recent data suggest that the stock market view is closer to the mark. The ‘soft landing’ of the U.S. and global economies seems to be over and balance of risks seems to have shifted towards stronger growth,” said Nariman Behravesh, Chief Economist and Executive Vice President of Global Insight. “Assuming that commodity prices do not snap back from current levels, the implications of this scenario are bullish for earnings in developed markets, but less rosy for emerging markets, which benefited from the commodities boom.”
Bull Market Ahead for Emerging Markets
Michael Hartnett, Global Emerging Markets Investment Strategist at Merrill Lynch, believes that 2007 will prove to be a strong year for emerging markets, particularly in Asia. “We are unequivocally bullish on the secular outlook for emerging markets. This asset class is undercapitalized, underleveraged and under-owned and yet it is in the midst of one of the greatest bull markets. In fact, massive savings are likely to boost growth and prices for many years to come,” Hartnett said. He also identified key risk factors that could harm performance in this region: global inflation, the strength of the U.S. dollar, a potential credit event and a protectionist policy with emerging market countries.
U.S. Dollar to Remain Weak as Investment Capital Outflow Continues
“The U.S. dollar’s outlook in 2007 hinges largely on whether the U.S. economy will have a soft or hard landing. Ironically, a hard landing could prove the best-case scenario for the dollar, as it would likely bring a narrowing of the current account deficit and repatriation of U.S. capital invested abroad,” said Rebecca Patterson, Global Currency Strategist at JPMorgan Chase. “However, we expect the dollar to stay on the defensive as long as investor appetite for risk stays positive, which in turn would lead to a widening of the deficit, and net foreign direct investment and equity continue to head overseas.” Although the dollar has dropped about 25% since its 2002 peak, currencies tend to revert to fair value in the long term and the dollar will bounce back in the coming years, Patterson added.
Investors Should Avoid Complacency by Diversifying, Rebalancing Portfolios
Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, expects the unprecedented levels of liquidity that drove both U.S. and international markets higher in 2006 to continue, but warns investors of decelerating economic growth in 2007: “We’ve seen an abundance of liquidity, strong corporate earnings growth, low volatility, a pause in the Fed’s raising of interest rates —all signs that indicate we will avoid a recession this year. This is good news; however, investors should keep in mind that liquidity-driven booms can be dissolved quickly by unexpected events. We also anticipate higher volatility in 2007, which gives investors an opportunity to rebalance their portfolios using a diversified, long-term investment approach.” Sonders recommends investors focus on health care, technology and consumer staples stocks.
Year-to-Date Performance of Major Market Indexes (as of 1/22/07)
Dow Jones Industrial Average: 0.11%Dow Jones Wilshire 5000 sm: 0.39%
Dow Jones STOXX 50 Index: -0.16%
Dow Jones STOXX 600 Index: 0.29%
Dow Jones Wilshire Asia-Pacific Index: 0.89%
Dow Jones Asian Titans 50 Index: 0.61%
Dow Jones Global Titans 50 Index: 0.07%
Dow Jones Wilshire Global Total Market Index sm 0.33%
Dow Jones-AIG Commodity Index: -3.13%
