While last year was full of market roiling events, 2011 will be equally chaotic because the financial crisis has not been resolved, according to Nick Beecroft, senior markets consultant at Saxo Bank.
“Sovereign debt crises, bailouts, stock market meltdown, head-spinning stock market rally, low interest rates, hyperinflation worries and galloping commodity prices: 2010 had it all,” Beecroft said.
“The expression 'kicking the can down the road' has become public property as banking institu¬tions and even sovereigns have been offered a lifeline funded by central bank printing presses, savers and tax-payer IOU’s in the form of new sovereign debt," he said.
The fundamental idea that not only profit, but also losses are an important part of a market economy has been ignored and instead we have a mantra of loss prevention in the name of stability, he said.
“Owners of senior debt may have been saved for now, but there are no free lunches, and the longer we try to pretend there are, the worse the cold shock of reality once we reach the end of the road," he added.
There is a chance that the first half will see more upside surprises for earnings, Beecroft said. But he is less bullish on the second half of the year and said he is worried the Federal Reserve, not fundamentals, is driving asset prices.
“The charging markets we witnessed as 2010 drew to a close were, in our opinion, largely driven by speculation that the Fed’s QE2 will work, not because it is working," he said. "After a brief buy-the-rumor, sell the fact reaction to the Fed’s actual Nov. 3 QE2 announcement, the rally proceeded again apace in December and the US S&P500 was trading to new highs since the Lehman bankruptcy."
“Our stance on risk is hence only mildly positive as the QE-boost only has so far to run and on the possibility that corporate have little more to squeeze out of corporate margins," he added. "Potential downside risks include a disruption in the sovereign debt markets – especially in Europe, and a commodities rally that gets out of hand and squeezes final demand and corporate margins.”
Stocks will hit a crossroads at some point in 2011, he predicted.
"Either the global – specifically the U.S. – economy has improved to an extent that supports the higher valuations, which call for 17 percent annualized growth in earnings per share over the next couple of years or the Fed-induced surge in risk sentiment will come to a grinding halt.”