Analysts across Wall Street and the City have spent recent weeks peering into their crystal balls, trying to pin down the likely course of economic growth, stock markets and currencies over the coming 12 months. Here is a rundown of some of their predictions for 2011.
Wall Street's finest are eyeing strong growth in the global economy – but instead of pinning their hopes on Brazil, Russia India and China (the so-called BRIC economies), they expect a pick-up in growth in the West.
The BRICs and other emerging markets are still likely to remain "solid", but Goldman's analysts expect investors to see a "mild deceleration in growth" in 2011 and stable, though still high, growth in 2012. By contrast, they expect economic activity in the advanced economies to pick up this year and "even more clearly into 2012, led by the US but visible also in Canada, the UK and Japan".
"The result is a modest narrowing of the performance gap between the developed and emerging market economies," Goldman said. "Much of this reflects the recovery in the US, which in turn is likely to force policy adjustments in other parts of the world." The bank does not expect any interest rate increases in the US, which has plenty of spare capacity.
Emerging markets, on the other hand, have "a lot less economic slack," which, when combined with a lessening of the risk of the US tipping back into recession, "may serve to reinforce the tightening of policy that is already under way in some quarters". "This dynamic could, in turn, serve to further dampen growth prospects there," Goldman explains.
If you are worried about the risks of a full-blown European sovereign debt crisis, Morgan Stanley's predictions may offer a glimmer of hope. While acknowledging that the Irish situation went from "worrisome to untenable in a matter of weeks", and that a similar set of events could well play out in Portugal and Spain, the bank expects the region to "muddle through". Crucially, Morgan Stanley analysts reckon that Europe can pull through "even if Portugal and maybe Spain also seek external assistance".
"Either way, we think investors are getting used to the reality that mini-crises will occur regularly, and therefore the negative market reaction to such events is declining," they said. "They key is that is that investors want a holistic solution to the debt problem, not temporary measures."
The Swiss bank's analysts are in bullish mood when it comes to the UK, expecting the FTSE 100 to vault to 6,700 points by the end of this year. Unlike some of the bears out there, they do not see the economy dipping back into recession. On the contrary, they expect Britain to "remain in recovery mode" and her economy to grow by 2.3 per cent during 2011.
"Against a backdrop of fiscal austerity and low interest rates, we see the private sector generating the bulk of economic growth ... In the domestic space, we see investment spending as an important contributor". They added that inflation was "almost certain to remain" high throughout the new year, meaning that the Bank of England governor, Mervyn King, would have to pen yet another explanatory letter to the Chancellor, George Osborne.
"That, combined with the recent upside growth surprise, will in our view prevent the [Bank's Monetary Policy Committee] from embarking on another round of quantitative easing," UBS said. "In fact, we expect the committee to begin tightening monetary policy, with gentle rate hikes starting in the third quarter."
Thinking of playing the foreign exchange markets? Well, be careful – if Standard Chartered is right, then 2011 may prove to be another year of "high volatility and large swings". Broadly considered, the bank expects 2011 to once again be a tale of two halves, with the US dollar strengthening during the first six months and then reverting to a weakening trend in the second half of the year.
On this side of the Atlantic, the euro is likely to remain weak during the first half, while sterling should begin the new year on a "fairly solid footing," the bank explained.
Further out, however, Standard Chartered said it was concerned that the Coalition's fiscal squeeze "could have significant consequences on medium-term growth prospects, and the pound should ease accordingly". Elsewhere, the bank is generally bullish about emerging market currencies. With the Chinese yuan, investors may see an acceleration of the recent appreciation in the early months of the new year as Chinese officials "shift their focus to containing inflation from promoting growth, while pressures for new foreign exchange adjustment remain strong". Over in India, the rupee is likely to remain volatile, according to Standard Chartered, as "capital inflows remain fickle" owing to global uncertainties.
Bank of America-Merrill Lynch
If it is equities that float your boat, then you might be in for a good year – at least according to Bank of America-Merrill Lynch. Its analysts expect the bull market which began after the global low in March 2009 to continue during the coming months. Their optimism is buoyed by various assumptions, including the view that the US Federal Reserve will hold back from raising interest rates.
They also expect continued gains in commodity prices, predicting that oil at $100 per barrel, gold at $1,500 per ounce and copper at $11,250 per tonne in 2011. In Europe, Merrill zeroed in on Germany as a favourite call. "Germany is in a particular sweet spot – strong core [macro-economic] data and a weakening euro should act as dual supports for the market," the bank said. "Business sentiment recently reached a 20-year high, while unemployment fell to a 20-year low. Rising wages in 2011 will spur domestic spending. As an added plus, valuations are not stretched – German equities are trading at a discount to the US."
Looking into 2011, Credit Suisse recently upgraded its view on the worldwide automotive and hotel industries, and the UK commercial property sector. "Autos have exposure to almost every theme that we like," the bank said, citing factors such as the potential for an upside surprise in core European consumption and higher corporate spending.
The sector also stands to benefit from the rise of the emerging markets consumer, with some 18 per cent of sales coming from the BRIC counties. With hotels, Credit Suisse highlighted the sector's gearing to corporate spending, which accounts for 65 per cent of its revenue. This bodes well, as "corporate free cash flow, profitability, and investment intentions are all abnormally high, while corporates have seldom been as under leveraged".
Lastly, the bank said that current yields from UK commercial property suggested that real estate prices could potentially rise by about 12 per cent, while property stocks could improve by 24 per cent. Other factors such as the recent stabilisation of rents and the fact Britain's real estate sector had lagged behind the US counterpart rather than performing in line with it, lent further support to its predictions, Credit Suisse said.