New Year, Same Europe
As soon as we hang our 2012 calendars we are, like clockwork, inundated with a plethora of economic prognostications. Eager forecasters make predictions ranging from 5,000 point market rallies to, literally, the end of the world. Forecasting, however, is a dicey pursuit. As 2011 proved, any number of unforeseen market-rocking variables can occur.
In keeping with our heritage, Beyond Bulls & Bears is taking a contrarian approach to forecasting, steering clear of sensationalism and relying instead on the opinions of three of our industry veterans who place emphasis on rolled-up sleeves research and long-term outcomes. Each shares his insights on three key factors that have been affecting global markets as 2011 drew to a close and as the new year swings into action.
Ed Jamieson, CIO, Franklin Equity Group, Peter Langerman, CEO, Mutual Series, and Gary Motyl, CIO, Templeton Global Equity Group, discuss ongoing economic developments in Europe, possible impacts of this year’s presidential election on the market and their respective outlooks for 2012 as a whole. We’ll start with Europe, which generated no shortage of drama throughout 2011 and still casts a persistently ominous shadow over global markets as the eurozone continues to struggle to solve its sovereign debt crisis and implement credit reforms. We’ll kick it off with Peter Langerman’s perspective on where that leaves Europe at the start of the new year and what developments he believes will transpire in the months ahead:
Peter Langerman: “Our view is that the Europeans are beginning to ‘get it,’ although it’s not quite clear that there’s a direct path from here to a solution. So it wouldn’t surprise us at all to see continuing volatility. Certainly, all the answers are not out there. Looking at the things that most people think need to be done, there’s some belief that steps are being taken toward that end, but not totally. Our view is that there will be continued volatility and significant ups and downs that will present opportunities as well as some risks for investors going forward.”
While Greek default and possible exit from the eurozone has been cited by some doomsayers as the first domino in a possible economic collapse of the euro, a more realistic appraisal would suggest that a systemic move in that direction by major European nations such as Germany, France, Italy or Spain is highly unlikely. The cost of such action would be prohibitive and potentially disastrous to exports, jobs and competitive viability. Nonetheless, Ed Jamieson concedes that while a worst case scenario is unlikely, it has been factored into a degree:
Ed Jamieson: “I think we have to expect continued uncertainty out of Europe in the near term. We need to factor in a likely recession in Europe and, in addition, the possibility, however unlikely, of a more catastrophic outcome with regard to their debt crisis management. But, having said that, I view these risks as very well known and I think pretty fully discounted in stock market prices.”
So, looking at events to date and into 2012, a big swing factor for markets at home and abroad will be the success ofEurope’s continuing efforts to fix its debt and credit issues. In spite of continuing uncertainty and correlated volatility, Gary Motyl believes progress made to date portends well for the year to come:
Gary Motyl: “I think we have to expect that 2012 is going to be affected by some of the same cross-currents that affected us in 2011: that is, there are macroeconomic issues which still need to be resolved. What we’re focusing on are the actual actions taken by certain entities around the world, whether it’s the ECB or the various individual governments. I would say, in some respects, that there’s been modest progress made on a number of fronts in the last few months. We think the European sovereign debt issue, while not resolved, at the least has been addressed in a manner which could eventually lead to a resolution.”
Until next time, we leave you with this pertinent bit of insight from Sir John Templeton back in 1949:
“The most costly errors in selecting stocks are made by people whose thinking is dominated by the question of the temporary short-term trend of earnings.”