What lies ahead for markets in 2011? Two high-profile economists summed up the themes to watch just before the New Year. In the bearish corner is Gluskin Sheff’s David Rosenberg. The markets may have had a good 2010, thanks to a “push in the back” from “aggressive” US monetary and fiscal policy. But watch out. Investors today are more bullish than at any point “since 2007 – just ahead of the market slide”.
The problem with stocks right now is that dividend yields are too low. The S&P 500 yield stands at 2%, while a ten-year Treasury bond yields 3.3%. So stocks are not giving investors much reward for the risk they are taking. “The market is too optimistic in the sense that investors are willing to forgo yield because they assume that they will get the return via the capital gain… The last time S&P yields were around this level was in the summer of 2000, and we know what happened shortly after that.” And don’t rely on the emerging markets in Asia to bail out the world economy. Their policy-makers are starting to get seriously worried about inflation. That means they will put on the brakes and rein in demand in 2011.
Yes, the 2010 recovery was “notably anaemic”, admits Richard Bernstein – Rosenberg’s more bullish former colleague at Merrill Lynch – but in 2011 it will pick up pace. Bonds and stocks “performed quite similarly” last year, but that will change. With interest rates likely to rise in the face of inflation and a growing American economy, investors should steer clear of bonds and plump for shares.
And for all the “talk about debasing the dollar… most investors remain unaware that the dollar troughed in April 2008” and has been rising since. “US employment will be stronger than most investors expect next year, which could produce positive surprises for US consumer stocks.” Indeed, says Bernstein, despite all the hype about emerging markets the S&P 500 outperformed the Bric (Brazil, Russia, India, China) markets by more than 3%.
He also expects Japan to reward investors. This might “run counter to investors’ expectations”, but Japan actually beat China last year too. “With expectations being so high for China and so low for Japan, we expect Japan’s outperformance versus China to continue.”