Despair will turn to hope in 2012 following stock losses in the first quarter, according to analysts at Goldman Sachs portfolio strategy research team.
“We think in the near term the market has further to fall as recession is further priced in and earnings downgrades accelerate,” Peter Oppenheimer, the chief European equity strategist at Goldman Sachs, wrote in a research note on Thursday.
After losses for stocks in the first quarter Oppenheimer expects a rally before the end of the first half of the year with major indices finishing the year 10 percent up on current levels.
“The timing of this rebound, however, is difficult to predict as it is party dependent on policy developments,” he said.
The euro zone economy will contract by 0.8 percent in 2012 according to Goldman Sachs economists, with a “sharp, albeit short-lived, recession in Germany and France and a persistent and much deeper one in the peripheral euro zone countries.”
Despite the recession, some kind of resolution to the euro zone debt crisis will lead to a rally for stocks and a narrowing of bond spreads according to Oppenheimer.
“Even if we get this resolution we think it is too late to prevent economic contraction. The rally that we have implies a 28 percent rally from the low, or roughly 40 percent on an annualized basis. This may sound very high, but it is slightly lower than the average annualized returns from bear market lows in previous recovery, or 'Hope' phases.”
The risk of the euro breaking up is low according to the Goldman Sachs analysts but if the worst happened, expect such an outcome to be chaotic and hugely damaging to economies, they warned.
In the absence of such a bearish outcome, Oppenheimer says investors should buy stocks with emerging market exposure and favors the FTSE 100 over the DAX or smaller-cap FTSE 250.