A lack of action on the US fiscal position could lead to a "buyers strike," according to Bob Parker, a special advisor to Credit Suisse.
“Assuming that the euro zone problems subside and that the market attention reverts to focusing on US fiscal policy, the current weakness of the euro could reverse in the first half of the year,” Parker said.
Any further setback for G3 bonds will be minor given the moderate growth and inflation environment, with monetary policy in the G3 on hold until at least the third quarter, he added.
“The Federal Reserve will continue with its policy of QE2 (second round of quantitative easing) and although the European Central Bank ideally wants to pursue an exit strategy, ongoing stress in Europe will prevent any immediate monetary tightening,” Parker said.
“Monetary tightening in emerging economies is likely to finish in the second quarter and the dollar will depreciate on trend against the emerging currencies and notably against the Asian bloc currencies.”
Growth and How to Invest
Parker is confident US growth will hit 3 percent in 2011, despite housing and employment weakness and believes if the yen weakens, Japan could eke out growth of 1.5 percent over the next 12 months.
“German growth could match that in the US but given fiscal deleveraging in the euro zone’s stressed countries, their economies will remain in recession or near recession for at least another year,” he said.
Growth in China and India will be around 9 percent in Parker’s view with Brazil and Russia growth between 4 and 5 percent.
“Equity markets are supported by valuations and low interest rates. Improved growth prospect imply outperformance in the US, at least in the first half. Japan will improve once the yen weakens.”
“Northern Europe will be driven by positive corporate earnings although emerging markets will be constrained by monetary tightening in the first half before outperforming in the second half,” Parker predicted.
Due to the positive growth outlook for demand in emerging countries, a fall in commodity prices is unlikely but, because they rose so much over the past two years, the upside is moderate, he added.