There appears to be a similar outlook playing out among the major Wall Street strategists – H1 of 2010 will be very strong as the trends of late 2009 continue to play out while H2 2010 will be fraught with risks that could lead to a sizable market downturn. RBC’s 2010 outlook is very similar to that of Credit Suisse & Morgan Stanley (read the full CS outlook here & the MS outlook here). RBC sees 4 major themes playing out in 2010:
- Fundamentals will continue to rebound led by growth
- Market technicals remain supportive, though slightly rich
- External backdrop improving, though risks abound
- Remain bullish in H1 with ‘catch-up’ trade; adopt defensiveness on approach of H2
The outlook for Emerging Markets (EM) is decidedly bullish on a long-term basis which should translate into solid returns in 2010 (particularly in H1), though the ongoing fallout from the financial crisis will continue to require disciplined risk management.
Heading into the back half of 2010 they see substantial risks arising. Among them are these 5 primary concers:
- A possible double-dip (U.S. or global) looms once fiscal support measures are allowed to expire if private-sector demand has not recovered sufficiently to carry the economy on a sustainable growth path, leaving the economy vulnerable to a return to another recession (possibly in 2011-12).
- The US dollar collapses in a disorderly fashion causing commodity prices to rise quickly, triggering a tightening of monetary policy globally that weakens the global recovery.
- EM policy makers employ increasingly unconventional policy measures to slow the appreciation of their currencies versus a trend-weakening of the USD, raising investor concern over EM policymakers’ commitment to market-oriented policies and preventing progress in correcting global imbalances.
- Fiscal largesse amongst EM countries is not reigned in as improved access to international markets gives governments a false sense of security, which eventually causes a trend deterioration in the debt burden (debt/gdp) of most countries, weakening a key leg of the EM investment case.
- A loss in confidence of governments in the G-7 to re-impose fiscal discipline and put debt dynamics on a sustainable track leads to rising long-end yields globally, a strengthening in the USD and tighter access to financing, triggering other ‘Dubai-like’ events.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.