Speakers at the fifth annual Dow Jones Indexes/ STOXX Ltd. Global Economic Outlook agreed that was the most likely economic direction for the year, despite concerns over global inflation, the struggling U.S. dollar and a potential bust in the commodities market, according to a news release.
“The soft landing of the U.S. and global economies seems to be over and balance of risks seems to have shifted towards stronger growth,’ said Nariman Behravesh, Chief Economist and Executive Vice President of Global Insight. “Assuming that commodity prices do not snap back from current levels, the implications of this scenario are bullish for earnings in developed markets, but less rosy for emerging markets, which benefited from the commodities boom.’
For his part, Michael Hartnett, Global Emerging Markets Investment Strategist at Merrill Lynch, looks for a particularly strong 2007 performance from emerging markets – particularly in Asia. “We are unequivocally bullish on the secular outlook for emerging markets,’ he said. He also identified key risk factors that could harm performance in this region: global inflation, the strength of the U.S. dollar, a potential credit event and a protectionist policy with emerging market countries.
Meanwhile, the U.S. dollar’s 2007 outlook depends mostly on whether the U.S. economy will have a soft or hard landing. Ironically, a hard landing could be best for the dollar, since it would likely bring a narrowing of the current account deficit and repatriation of U.S. capital invested abroad,’ said Rebecca Patterson, Global Currency Strategist at JPMorgan Chase.
“However, we expect the dollar to stay on the defensive as long as investor appetite for risk stays positive, which in turn would lead to a widening of the deficit, and net foreign direct investment and equity continue to head overseas,’ Patterson said. Although the dollar has dropped about 25% since its 2002 peak, currencies tend to revert to fair value in the long term and the dollar will bounce back in the coming years, Patterson said.
Finally, Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, said she expects the unprecedented levels of liquidity that drove both U.S. and international markets higher in 2006 to continue, but warns investors of slowing 2007 growth. Sonders recommends investors focus on health care, technology and consumer staples stocks.