Stock markets are likely to see a selloff of around 10 percent in the second quarter but over the longer term share prices may go even lower, according to Bob Janjuah, co-head of global macro research and head of tactical asset allocation at Nomura Securities.
Janjuah, known for his bearish calls, wrote in a recent market report that although a systemic crisis in the euro zone had been avoided, the area was in such bad shape that it would not contribute to global economic growth for the next three to five years and the picture could become "much worse" if Spain follows in the footsteps of Greece.
"Now that we have moved on from the systemic crisis in the euro zone, it is now becoming clear to an increasing number of people that we have merely swapped a dramatic V-shaped collapse-followed-by recovery for a long-drawn-out period of weak growth," Janjuah wrote.
In the U.S., where some analysts say the recovery is taking hold and say the bull market will continue, he believes seasonal and weather factors have artificially boosted data over the past three-four months but these are now over. He sees the U.S. economy growing at a rate of 1.5 percent this year compared with more optimistic forecasts of 2.5 percent.
"The U.S. consumer is in a weak and vulnerable position. Savings have been run down, to worryingly low levels, house prices are still falling, but the jobs picture is already turning down and gasoline prices are up nearly 20 percent from the December lows—and rising," Janjuah said.
China is "definitely landing," its measures to ease monetary policy are "well behind" market expectations and the country is transitioning from 10 percent economic growth to 7 percent this year and maybe to 5 percent over the next three to five years, he noted.
No More QE?
"I remain concerned at how little focus is given to the very poor demographics in China, and I remain concerned at how little focus there is on the state of the ‘banking’ balance sheet in China, and on the true levels of underlying indebtedness that exists in the Chinese economy," Janjuah wrote.
He also said that he did not expect the Federal Reserve and the European Central Bank to take any more quantitative easingsteps, in the case of the ECB "unless of course Spain really implodes."
In the second quarter the data, both on the macroeconomic front but also earnings will likely be weak, according to Janjuah.
"Put all this together and I think in the second quarter we should expect a nice 10 percent equity sell-off, with the S&P 500 falling from 1420 (+/-20) to 1280 (+/-20)," he said.
Ultimately, Janjuah expects the S&P 500, the global proxy for the risk-on/risk-off trade, to fall to 800 and the Dow/Gold ratio—the ratio of the price of gold to the level of the Dow—to hit parity from the current 8 "before we can begin the next multi-decade bull cycle."
"I think the battle between central bank inflationist policies and the natural cycle of deflationary debt deleveraging will continue to be attritional, and it may drag well into 2013 and 2014," he wrote.