Anyone who reads business newspapers, surfs online finance portals and watches business TV could easily be pondering, with the fiscal cliff looming in the USA and a raft of worrying forecasts, what gives for 2013?
Let me be upfront and tell you what I’m expecting and it will explain why I could be very conflicted about whether I’m right or not.
Warning: sheer drop
I reckon the fiscal cliff will be fenced off before Christmas and the stock market will spike higher ahead of a nice run for stocks over January and February.
Before that there will be ups and downs until the market believes the pollies in the US Congress have brokered a decent deal to impact the country’s growing deficit and debt challenges.
Helping the big economic picture, which ultimately drives stock markets, will be an improving Chinese economy, which will look stronger for longer by the middle of next year.
This will add to a recovering US economy and together these two good news stories will offset the weakness in Europe, but even there I suspect by mid-year there will be some better economic news.
The muddle-through thesis
It’s a picture of a new phase of my ‘muddle-through’ thesis that I have argued since late 2008.
I always argued that government interference could avert a Great Depression re-run and that stocks would gradually pick up. I was right, and I hope I can remain on the money.
You might be saying: “So what?” but this has been a big argument for me as I fought those who were advising investors term deposits were the best bet compared to stocks.Unexpected returns
The portfolio of income stocks we put together for our clients and our Switzer Super Report for self-managed super funds was up about 14% a month or so ago, and the half-year worth of dividends were worth 4% with another 4% expected before the year was up.
Now we never expected this return. In fact we would have been happy with 8% in dividends and maybe 2% for capital gain, but that’s the value of stocks that pay dividends over term deposits.
Ironically, for those in a portfolio like our dividend one, even if stocks fall next year, they will still probably pocket 6% plus from dividends, and while their capital could fall, it will come back — it always does with the right portfolio.
Anyway, given my economic scenario expressed above, I expect stocks will be up next year and 10% might be a pretty good guess. By the way, both BlackRock and Goldman Sachs have made similar guesses.
Clearly, this is all good news but there is bad news out there, which has made me a little insecure.
The US Conference Board, an august body, is negative on the global economy and it argues, “Europe's prognosis is even worse, with France trapped in depression with near zero growth as far as 2025 and Britain struggling to raise its speed limit to 1% over the next three Parliaments,” the UK’s Telegraph reported.
But wait, there’s more bad news with the Board bagging the BRIC countries — Brazil, Russia, India, China — arguing that “the low-hanging fruit from cheap labour and imported technology has already been picked”.
It put China’s growth at 6.9% next year, then to 5.5% from 2014-2018, and 3.7% from 2019-2025.
I think this is crap, but I could be wrong! Let me say, I haven’t been for a few years and some of these respected forecasters have been way off the mark, but I can’t expect to be always on the money.
The Board bags India’s growth prospects, many do, and it says that Brazil will chase middle-income goals at the expense of productivity and will lose growth momentum.
On the other hand
But just as the Conference Board was making some reach for their razor blades, out comes the Paris-based Organisation for Economic Co-operation and Development (OECD) with a more positive picture.
“South-east Asia's economic growth will return to a ‘robust’ pre-crisis average of 5.5% over the next five years, according to the OECD's latest forecasts,” Reuters reported.
What I liked was the fact that the OECD said: “The 10 economies of the Association of South-East Asian Nations (ASEAN) will show ‘resilience’ to the predicted slowdown of China and India”.
The OECD has China growing at 8.3% over the next five years, which is less than the 10% plus we got used to, but it’s miles better than the Conference Board’s 6.9%, which slips to 5.5%. India is tipped to grow at 6.4%, which again is better than the Conference Board’s 4.7% pace.
Help is on the way
South-east Asia is made up of Brunei, Burma (Myanmar), Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand and Vietnam and it’s expected that they will pump up domestic demand, which will help the global economy and exporters of raw materials such as Australia.
With Europe providing less demand next year, the middle-classification of ASEAN countries could be a buffer for the world economy, and if China as well as the USA can deliver better growth, then I see my muddle-through thesis keep on muddling on.I’m sticking to stocks for 2013.