Equities and commodities are set for a strong rally in the first half of 2012, but will likely retreat later in the year as the deleveraging process continues to take a toll on economic growth, market forecasters said on Thursday.
At the Empire Club’s 18th Annual Investment Outlook 2012 in Toronto, presented by the Investment Industry Association of Canada, speakers suggested that while economic growth will likely continue to be weak this year, plenty of investment opportunities exist.
“We think there’s going to be opportunities to make money this year – particularly in the first half of the year,” said Stephen Harris, head of research at Macquarie Capital Markets Canada.
Harris expects a couple years of slow economic growth as consumers, governments and banks take steps to reduce debt. Every dollar spent on deleveraging, he explained, is a dollar not spent on economic consumption.
“Deleveraging cycles are protracted, they’re painful, and typically, they haven’t been particularly friendly to either economic growth or equity markets,” he said. As this cycle runs its course, he expects U.S. GDP growth of about 2% over the next two years, with interest rates in developed markets likely to stay close to zero.
However, unlike consumers and governments, corporations have strong balance sheets, which bodes well for stocks.
“Corporate balance sheets have never been stronger,” said Fred Sturm, executive vice president and chief global investment strategist at Mackenzie Financial Corporation. “Valuations are attractive,” he added, “and wealth creation is continuing.”
Harris predicts that earnings of S&P 500 companies will grow by 7% this year, and that investors will see single-digit returns over the next two years. In the first six months of the year, he expects the S&P to rally to 1,400 or 1,500 from 1,250 at the end of 2011, while the S&P/TSX composite index will rise to 14,000 or 15,000 from roughly 12,000.
The outlook is less rosy for the second half of the year, when the U.S. is expected to tighten fiscal policy, further hampering economic growth. By the end of 2012, Harris expects the S&P 500 to retreat to 1,325 and the TSX to ease to 13,500.
Gold expected to reach US$2,500
All of the forecasters are positive on the prospects for gold. Nick Barisheff, president of Bullion Management Group Inc., said that as governments continue to battle unsustainable debt levels, the price of gold will inevitably rise.
“Currencies are losing purchasing power against gold, and therefore gold can rise as high as currencies can fall,” Barisheff said. “Since currencies are falling because of increasing debt, gold can rise as high as government debt can grow.”
Harris expects the price of gold to rally to US$2,500 per ounce in 2012, and Barisheff expects that longer term, it will move substantially higher.
“It doesn’t matter whether gold ends 2012 at US$2,000 or US$2,500, because gold’s final destination will make today’s price seem insignificant,” Barisheff said.
Harris also expects strong performance in other resources, including energy and base metals such as copper.