LAST year was an eventful one for financial markets as sovereign debt worries and slowing growth fears fuelled volatility.
With continuing uncertainty and concerns about countries slipping back into recession, it seems 2012 may turn out to be much the same as 2011.
Over the past few months, economists’ consensus forecasts for GDP growth and corporate earnings have been steadily revised downwards in many countries.
While equity markets have discounted the prospect of difficult times ahead already, they will have to decide if valuations are correct in an environment of greater uncertainty for earnings growth.
Against these challenging conditions, the US economy has been regaining momentum after making a disappointing start to 2011.
The economy enters the new year with steadily rising employment and a recovery in bank lending to non-financial companies.
There can be little doubt that the US would feel the impact of a eurozone recession and a large proportion of overseas earnings for the S&P 500 derive from Europe.
However, the US is still a relatively closed economy.
Slowing global demand will affect the US, but the economy is still largely driven by domestic demand, which is exhibiting slow to moderate growth. As for Europe, Fitch, the credit rating agency, put a number of the eurozone economies, including France and Italy, on ‘watch’ for potential downgrades in the coming months.
The agency concluded that a comprehensive solution to the eurozone crisis was ‘technically and politically beyond reach’.
Another concern for 2012 is the potential for political upheaval, with government elections due in the US and Europe.
In the US this could be positive as it may give greater political certainty and create further stimulus and job growth.
The biggest worry in the eurozone is that a political party comes into power which is against the latest financial bail-out plans.
This could be an issue in France, which has elections in May. The Socialist party is among the favourites to win and has said it wishes to renegotiate the latest financial plan.
Investors will remain concerned that the eurozone’s leaders are still failing in their attempt to credibly resolve their financial crisis and the issue of sovereign debt sustainability behind it.
There are also what Donald Rumsfeld once referred to as the ‘unknown unknowns’ – things that can not be legislated for.
Unpredictable situations may occur that lead markets in a positive or negative direction.
Events in North Korea and Iran will be followed closely by investors too.
As we go into the year ahead, markets will have much news to digest and it will no doubt be another eventful 12 months.
Steven.Keppie@Brewin.co.uk
