Despite growing bullish calls on the U.S. equity market, doubts still hang over the global investing landscape. In particular, Europe remains a source of uncertainty and fiscal austerity throughout the developed world will challenge investors.
“There are a number of issues that have not yet been resolved,” says Luc de la Durantaye, first vice-president, asset allocation and currency management, CIBC Asset Management. “The fiscal agreement between European countries hasn’t been fully ironed out, and it hasn’t been approved by the various governments.”
The sovereign rescue fund (European Stabilization Mechanism) has yet to begin operations, and it hasn’t even been funded yet—don’t expect the euros to pile up in that account until the summer.
“We’re still lacking support for sovereign debt. The ECB has provided liquidity for the banking system, but they still need to provide a bridge to the sovereign [lenders], particularly Italy and Spain which have a lot of maturities coming up in February, March and April.”
These refinancing auctions could unnerve the market, he says, which would drive up borrowing costs for the issuers.
“At every crisis we’ve seen an improvement in the management of the crisis and a reduction of the risk. In the longer term, there will be fiscal austerity which will have a negative impact on world growth. We’re going to be in an environment of slow economic activity, especially in the developed world.
He says equity investors should be cautious in applying historical valuations to stocks in this environment, as the coming decade of fiscal austerity measures will be unlike anything seen in the past.
“You can’t compare today’s valuation with the last 10, 20 or 30 years,” he says. “That said, valuations are still very fairly undemanding and that probably gives some protection to the downside on equity markets.”
And if Europe’s woes aren’t providing enough uncertainty, there’s still the little matter of the U.S. election in November.
“But we think the global economy will remain on a growth path, albeit a sluggish growth path,” he says. “We are positive on the emerging markets; 2012 will be a year where they will want to protect growth. Monetary policy there has already started to ease, and that has provided a better environment for emerging equity markets.”