Europe, Shmeurope. If you looking for good news, ING has it.
“Don’t listen to noise coming out of Europe,” said Douglas Cote, chief market strategist of ING, at a press conference Wednesday where the firm offered its outlook for the new year. “The [European Central Bank] will be forced to jump in. I expect an end-of-year rally.”
Paul Zemsky, ING’s chief investment officer of Multi Asset Strategies, says while Europe may suffer a mild recession in 2012, the U.S. will experience tepid growth between 2% and 2.5% With housing weak and the Federal Reserve not raising interest rates until 2013, he says inflation won’t be a problem, staying around 2%. However, he says this growth won’t be enough to bring down the unemployment and if per-capital income remains stagnant, this could cause some social unrest. And while the housing sector has bottomed out, he says it may take another year before the market begins to see a sustained recovery. The main risk to the U.S. economy is the contagion of a European slowdown.
Still companies continue to post record profits, keeping expenses low by not hiring new workers. Zemsky expects the S&P 500 to surge 9% by the year’s end to 1325, and again to 1450 by the end of 2012. “Unless,” he adds, “ Europe blows up.”
You can track the benchmark with the largest ETF in the world, the SPDR S&P 500 (SPY).
“How can you not be in the market with earnings hitting record highs?” asked Cotes, suggesting market fundamentals will continue to be strong in the face of rising global risk. In addition to rising corporate profits, he sees U.S. manufacturing expanding and retail sales at their highest levels after seven consecutive monthly increases. “As far as eye can see we see positive quarters.”
Mid-capitalization stocks are the “sweet spot of the economy,” he says, because they have the financial wherewithal of large-caps and the growth of small-caps.” He also like emerging market stocks and global real estate investment trusts.
For mid-cap stocks take a look at SPDR S&P MidCap 400 ETF (MDY).
As for those global risks, Cote says Europe’s “bank recapitalization plan is an effective fence around the crisis.” In addition, if China begins to experience a slowdown, South Korea and Turkey will pick up the slack.
The Institute of International Finance said the recapitalization plan has “serious problems” that will hurt economic growth.
Meanwhile, China is one of South Korea’s major trading partners. If China stops buying South Korea is going to have to find a lot of other clients just to break even.
Christine Hurt sellers, ING’s fixed income chief, continued the trend of discounting Europe, “there are a lot of good opportunities, unless you think there will be a massive global recession.” U.S. companies are well prepared for any credit crunch because they have nearly $1.5 trillion in cash on their balance sheets.
She likes high-yield bonds, because spreads are wide, but not consumer cyclicals. She also recommends buying sovereign debt in emerging markets. With emerging markets seeing inflation declining and credit quality increasing people should “take advantage of the shift in liquidity out of Europe.”
She expects the ECB to come save the euro zone, but if you wait until the ECB acts, it will be too late. Because there is very little liquidity in the credit markets, she says you need to buy bonds you are willing to hold for a long time.
I wasn’t very satisfied with their optimistic answers about Europe’s problems. Even though the ECB is the chief monetary authority for counties that use the euro, European Union treaties forbid it from being the lender of last resort for member countries. And as Roubini said last week, that’s not going to change.
Hurtsellers said Italy’s high bond yields are worrisome and if Italy doesn’t get enough tie to restructure, the whole thing could balloon out of control. If that happens, “market’s can create their own chaos and we’ll see more pressure on Germany.”
Zemsky added that while the ECB has remained out of the picture in terms of directly financing governments, if the European banking system seizes up, the ECB would supply quantitative easing. Why did he think that? “Because in 2008, the Fed stepped in to where we never would have expected it before, but they did it to save the world.” True, but the Fed had the power to do that and the ECB doesn’t.
“The ECB will stand behind a bank if they have enough collateral. If that doesn’t happen,” said Zemsky, “that’s the worst case scenario and will lead to a much worse recession of possibly negative 4% gdp growth in Europe.”
That should put our minds to ease.