Key Challenges for the Global Economy and the Stock Markets Ahead

So far, analysts have been pointing towards a stable growth in the economy and green tickers in stocks, but now it seems that we will have to re-look at the current economic picture and strategize where to invest.

Markets have performed much better than expectations in 2010; however, there was enough volatility to shrug off weaker hands. Despite that, key indices were able top post handsome returns, anywhere from 10% to 30% in most cases. The S&P posted a solid 12% revival and it clearly reflects the two year high bullish sentiment.

What are Analysts’ Predictions for 2011?

The best way to forecast future trends in stock markets is to conduct a survey among the most experienced analysts, as they usually get it right. Bloomberg took up the initiative to do so and queried top 11 financial experts from leading brokerage firms across US. Well, the outcome of this survey is quite buoyant as all 11 experts expect the markets to head higher in 2011. They suggest that the stocks will climb another 10% from current levels, which is by far the best one can expect after seeing a stellar 2010.

Can these Analysts go wrong? What could impact growth in 2011?

Taking into account the negative scenario that is developing for domestic equities, we must understand that the markets are yet to discount any such developments as they pan out. Currently the market sentiment is overly bullish, so the initial jerks could be nasty. Headwinds for 2011 trade have started cropping up, and I have mentioned the risks that we could face headed into the next quarter and rest of the year.

Decoupling Myth: Interconnected Global Risks

The most threatening factor above all other risks is the over escalated sensitivity to global reactions. In past few years asset correlations have grown, especially when we look at major developed markets. We saw the impact of recession in US on the rest of the world.

The key interconnected global risks are on the macro front. Bad news is not just centered in US, other major markets such as Japan, which is still not able to get out of the deflationary crash, is witnessing a fast shrinking economy. On the other hand, European sovereign debt is laying jitters on rest of the world. On the domestic front, our muni-bond market concerns are getting nervy. So, the point is that global growth is extremely sensitive to persistent fears on all above mentioned issues, and a clear growth trajectory is not yet visible.

Just like US, even Japan is submerged under debt and its population is highly reliant on pension support, which is becoming a burden on the system. We can expect the outrage to start from the land of rising sun, fast creeping into the financial systems across Europe and America.

The Global Economy is headed for a Slowdown in 2011

In US, the growth pickup which we have witnessed over the last four quarters dosen’t seems sustainable. Even the Fed expects the growth rate to slowdown over the next few quarters. The key reason behind this would remain the shaky consumer confidence, due to the fact that housing market is not rebounding. Some analysts are of a view that housing prices will further slide, which will freeze consumer spending to a large extent and recovery will take a long haul.

On the global front, inflation is coming in way of economic recovery. Especially, emerging markets are facing price rise pressures, which are the main reason behind monetary tightening in major developing economies like China, Brazil and India. Inflationary pressures are mounting up and it could lead to severe food crisis in many poor countries.

Emerging nations are increasing their CRR, in order to cope with rising prices and this intern is becoming a dragger for growth.

Conclusion

Most of the current cheers are on the back of stimulus money, which otherwise is a burden on future growth possibilities. Investors should take cover in safer instruments and be happy with dividend yields and fixed returns as current adventure with stocks can easily lead to fierce accidents in 2011.

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