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After the Bounce, Where Are Stock Markets Going?

Tuesday, 13 Mar 2012 | 8:09 AM ET

Stock markets around the world have regained positive momentum this year, and are likely to continue a gradual upwards climb for the rest of the year, leading investors told CNBC.

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“The world isn’t as bad as we’re making it out, it’s just not getting better as quickly as we’d like it to,” Richard Madigan, chief investment officer, global access portfolios at J.P. Morgan Private Bank, told CNBC Tuesday. “Fundamentals are back, that’s great news.”

The S&P 500 ended 2011 - which was initially tipped to be the year that stocks recovered emphatically from the credit crisis - on a similar level to where it started, after a rollercoaster year dominated by the euro zone debt crisis.

“A large part of the bounce in markets over the last two months has really been a re-set in terms of payment for last year,” Madigan said.

He predicted that the market bounce can keep going but not in a straight line.

One of the main reasons markets have been boosted is the mass injection of liquidity by central banks around the world. The private sector now has to take over from the public sector in boosting the markets, according to Madigan.

“The transition risk is public sector bifurcation supporting the markets to private sector investment. If there isn’t enough confidence from the private sector, this breaks down and the debate we may be having is stagflation,” he said.

Corporate earnings performed broadly better than expected during 2011, and Madigan predicts another 5-7 percent earnings growth in the US this year.

“I think the biggest challenge for markets is can we get: relative stability; 2-2.5 percent growth; a disinflationary environment and then be repaid and focus on earnings growth,” he said.

Trading volumes have been low in recent weeks as the markets adopted a wait-and-see approach, with Monday marking the lowest volume of stocks traded on the American exchanges this year to date.

“There definitely seems to be more standing on the sidelines,” Lucy Macdonald, chief investment officer, Allianz Global Investors, told CNBC.

“We’ve had some very strong moves in a short period and it makes sense to take some of those down a little bit.”

She forecast a rise of around 10 percent in key indices for 2012, and thinks there is more upside in the next three to five years for stocks.

“Tactically, we’re just waiting for some of these overbought stocks to come back a bit more. It makes sense to wait a bit more,” she added.

The euro zone crisis is still on the minds of many in the markets, despite the conclusion of the Greek debt deal, after Spain warned it may not meet deficit reduction targets.

“What was a financial panic has now taken hold of the real economy in Europe. This year is when people in Europe start feeling the crisis,” Sony Kapoor, managing director, Re-Define, told CNBC.

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