As regular readers know, we’re big fans of Morgan Stanley Europe Strategist Teun Draaisma. Tyler over at Zero Hedge has an excellent piece on Draaisma’s 4 biggest concerns. It’s highly recommended reading:
As Europe continues shouldering the burden of the devaluing dollar, courtesy of a Euro that just wont quit, even as the Eurozone is constantly putting out fires in its own backyard (Greece, Hypo, Latvia, ongoing downgrades), the optimism over European prospects is now more pervasive than ever. In a report titled “Key Surprises for 2010” Morgan Stanley’s ever insightful Teun Draaisma has attempted to present the intangibles: the unquantifiable risks. As he points out “if there is a lesson the markets keep telling us, it is the persistence of uncertainty. Unlike risks, which are known and measurable, uncertainty is difficult to calibrate. We can never know the exact payoff distribution for any given investment.” In order to conceptualize the 4 key areas of possible systematic impact, the strategist has provided 4 main scenarios he believes may shape equity returns over the coming year in a downside case.
And while the favorable surprises are relevant, but never as important in making investment decisions, Teun’s four axis of downside “surprise” are the following:
- A late-cycle credit crunch seriously curtails access to bank lending in the non-financial sector.
- Brisk growth in emerging economies and/or renewed supply set-backs causes another spike in commodity prices.
- Ample liquidity helps to keep government bond yields subdued, notwithstanding massive debt issuance.
- Country-specific political risks replace systemic risk concerns in driving intra-EMU spreads, but matter less than expected in the UK.