Global stock markets will not be able to overcome a lethal mix of rising inflation and a spill-out from the global credit crisis this year, with most indexes likely to end 2008 with annual losses, a poll showed.
As a group, strategists have lost faith in the ability of stock markets to achieve anything more than a partial rebound, even though the US Federal Reserve has hacked rates down to 2.0 per cent and markets have made a strong comeback from March lows.
They fear that soaring oil prices, which made their biggest daily jump ever on Friday surging $11 to a new record above $139 a barrel, along with a steady stream of bank write-downs are likely to see the US market make its first loss for six years in 2008.
The quarterly poll of around 120 equity strategists from New York to Tokyo showed only the Toronto and Taipei exchanges posting gains this year. Nine of 13 global indices in the survey saw downgrades made to consensus forecasts taken in March. Pessimism may have deepened further since, because the polls were taken before markets were rocked on Friday by the worst reading for US unemployment in 22 years.
World stocks reached a 1-1/2 month low on Monday. US investment bank Lehman Brothers added to the gloom, unveiling forecasts for a huge second quarter loss along with plans to raise $6 billion of new capital to tidy up its books. Its shares tumbled in pre-market trading. "Equities are attractively valued, it’s just uncertainty is very high," said Patrick Schowitz at HSBC.
"We need to see a turn in the cycle and at the moment the easy call is that we will see some near-term strength with stimulus from the US, but after that things are uncertain." US Congress passed a $152 billion economic stimulus this year to help ensure the economy does not slide into recession, but this may not prove anywhere near enough. Strategists agreed that volatility would remain high during the rest of the year.
On Friday, the Volatility Index jumped some 26.46 per cent to close at 23.56, its biggest daily percentage jump since markets fell sharply on March 13.
OIL DOUBTS
Much will depend on the outlook for oil, which some predict will hit $150 a barrel before long as the dollar falls anew. The European Central Bank warned last week it stands ready to raise interest rates as soon as next month to combat rocketing inflation, sparking some fears that the Bank of England could follow suit. "The next six months are expected to be tough for equity markets ... Inflation worries may fade, if oil and food prices drop back, but could be sustained if they do not," said Tony Dolphin at Henderson Global Investors in London.
Frankfurt’s DAX and Paris’ CAC-40 are both set for around a 10 per cent loss this year as well as the pan-European DJ Stoxx 50 index.
Many stock markets in Asia do not look in much better shape. Tokyo’s Nikkei 225 index is forecast to end the year down about 2 per cent, while the Hang Seng index is seen down 6.5 per cent by year-end. Higher interest rates could see equity markets cooling even further than currently expected. Equity markets in the euro zone are forecast to fall by around 10 percent this year, much higher than the marginal slips strategists pencil in the US and UK.
Euro zone exporting companies may also feel the pinch this year from a renewed bounce in the euro, which spiked to a six-week high on Monday to $1.58 to the dollar. Strategists are split on how to find returns this year in the face of a slowdown. Many are prepared to stick close to the benchmark, while others spot bargains in hard hit sectors such as financials.
In the US some said technology will be the sector to shine in 2008 as it jumps the financial sector in terms of size in the S&P 500. And that may just provide the boost that strategists crave despite the pernicious effects of surging inflation. "I think we’ll see a nice rally toward the end of the year based on an economic recovery," said Peter Cardillo, chief market economist at Avalon Partners in New York.
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