Outlook: Hangover due in the new year

Click to follow
The Independent Online
Everything is for the best in the best of all possible worlds. That appears to be the philosophy of Anglo-Saxon financial markets, at any rate. Both the Dow and the FTSE 100 index are heading back towards their record peaks, while the US and UK government bond markets are on an improving trend once more.

Crisis in Asia? So what. Growth will be made to slow a bit, but that's just what the doctor ordered. The financial turmoil of the last two months has made for a healthy correction in the more exuberant markets. Global deflation? It's the fashionable bogeyman for analysts to fret about, but it also still has the mythical status of a monster under the bed. Investors don't expect it to reach out and grab them by the ankles.

Investors on the whole continue to believe inflation will stay low and corporate profits healthy. There are plenty of reasons for optimism but for the dirty realists amongst us, it is all too good to be true. One niggling worry is that the Bank of England thinks it will hit its inflation target only if growth slows sharply next year - and it has a relatively optimistic inflation forecast. That doesn't square with the outlook for profits implied by the rising FTSE 100. Another issue is the monstrous success of the US job-creation machine. It is starting to trigger higher pay growth, and this has not been factored into profits forecasts either.

Something will give, and it is more likely to be rosy growth than low inflation. A straw in the wind was the latest Merrill Lynch survey of fund managers, showing the greatest interest in selling rather than buying equities for well over a year. Watch out for another puncture in the bubble of stock market optimism in the new year.

Comments