NO one would be surprised if the global stock market, having made a strong start to 2012, were to re-encounter its deepest fears at some stage.
The three broad danger areas facing investment markets in late 2011 are all still out there. Namely: unresolved issues in the euro area; uncertainty about economic growth in the US and China; and, more subtly, deep-seated investor scepticism about financial markets and analysis, and with it a marked reluctance to take risk.
In the case of the euro area, we still don’t know just how widely (and messily) distributed will be the private-sector losses on Greece’s bonds.
Funding of the EFSF and the pending ESM is still unclear, as is the short-term budgetary outlook for the peripheral countries. There is an EU summit looming, but few investors will be holding their breath on that one.
The growth outlook in the US is still overshadowed by the possible expiry of tax cuts and labour market support, and by the perceived need for drastic consumer deleveraging.
China’s GDP may not have slowed noticeably yet – last quarter’s deceleration was not statistically meaningful – but many still warn a hard landing is imminent.
Lastly, investor scepticism isn’t going to disappear any time soon. Not least because the crisis has shown that much financial analysis has been in need of an overhaul.
But this doesn’t mean there has been no progress at all since the autumn, at least under the first two headings.
The ECB’s support for euro area money markets, with another potentially huge second tranche still to come in late February, seems to be capping the interbank spreads that gauge banking stress.
The improved tenor of US labour market data and consumer confidence is looking a little less like a seasonal aberration. Beneath the headline disappointments, US bank results suggest that underlying asset quality is, if anything, continuing to improve.
We continue to believe that the corner is very slowly being turned, and that both the euro area banking system and the global economy will regain some poise in 2012.
Be wary of what passes currently for received wisdom even outside the pages of efficient markets textbooks.
How often do you hear (for example): “We can’t pay for our pensions”; “There’s too much debt”; “The euro can’t survive”; or “Things haven’t been this bad since the 1930s”?
None of these assertions are necessarily true, and the last is not just wildly inaccurate but in questionable taste. To the extent that current asset prices have been depressed (or elevated, in the case of bonds) not just by the undoubted risks that are out there, but also by an overly-pessimistic climate of opinion, there is more room (eventually) for a sustainable rebound in risk assets as people’s worst fears fail to materialise.
:: Andrew Miller is regional office head of Barclays Wealth in Newcastle