Investor's window  |  June 22, 2012 10:54:43

The worsening outlook for the global economy reduce potential summer rally

While almost all investors' attention concentrates on events in Europe (Greek elections, the Spanish problems), the background is a rather important change in the overall economic environment. During the last three years, stock markets pulled up the process of economic recovery after lehmanovské financial and economic crisis. Occasional market corrections were mainly induced by a temporary increase in risk aversion, usually due to the situation in Europe.

Also, correction, which takes place in the markets during the second quarter of this year, at first glance look like pure debt crises caused. Investors could therefore easily be expected that after (another temporary) calming the situation in Europe could return to the stock index values ??from the end of the first quarter of this year. So say the German DAX index of the value of at least 7100 points, about twenty percent higher than the dips in early June respectively. eleven percent above the current level (6400 points).

Unfortunately, I believe that such expectations are not clearly against the background of the deteriorating condition of the real global economy. Let's look at one of the best standards of economic activity - PMI (orISM) in the industry in three key regions: the U.S., the eurozone and China. As shown in the graph below, this composite indicator fell below padesátibodovou boundary that separates expansion from contraction of the industry. Yes, the truth is that practically the same decrease was also seen in the autumn of 2011 and after two months again came expansion.

I believe however that the situation is different this time. First, the debt situation in Europe is obviously much more than last year reflecting the real economy. Perhaps only a miracle would change the assumption of stagnation to mild recession for the euro area for at least the next three quarters. While the risks are much more negative than positive side. To do this, we have China, whose economy is clearly slowing, so that GDP growth reaches the eight percent threshold. Elsewhere, a great result in China very weak number. And the U.S.? Just look at the data from the labor market to make it clear that the economy is more vulnerable now than it was last year and economic problems of Europe and a slowdown in China and overseas inevitably begins to take its toll.  

When we come back to equity markets, the development of the global economy will require a reduction in expected profits and hence the market valuation of this title. I do not think that the strategists of large investment banks have adequately responded to the changed global economic situation - for example, expected profits for U.S. companies this year and next compared with the cut end of the first quarter of 2012 by a mere one percent. It will be more. The worsening economic outlook may not be currently very visible impact on the development of stock markets. Market valuation is now mainly driven by risk premiums. However, the worse the economic outlook is reflected in the time when the markets calm down and the risk premium returns closer to normal.The potential stock rally will be lower than the one we have experienced such as from December 2011 to March 2012.

Marek Hatlapatka
Head of Research Cyrrus

Marek Hatlapatka (1978)

He graduated from the Faculty of Economics VSB-TU Ostrava, completed 3-month internship in London and fundamental analysis intensive course led by former chief analyst at Erste Bank Gale Kirking. In Cyrrus, ashas been employed since 2006, when he took the place of analyst stock markets with a focus on foreign markets, pharmaceutical and banking sectors. Subsequently, he specialized in banking, electricity and coal in these sectors are now the most sought after professionals in the Czech Republic. In 2008 he became head of analytical department Cyrrus, as in this position operates even today. Long one of the most cited Czech economist, in 2010 became the fourth most cited economist in the Czech media.

Cyrrus, as is a licensed securities broker. The company was founded in 1995 and is currently the largest brokerage companies outside Prague. Is a member of the Prague Stock Exchange and the Stock Exchange in Warsaw. Cyrrus, Inc., provides comprehensive services to private capital markets and corporate clients, focusing on stock trades in the SPAD system of the Prague Stock Exchange and trading on foreign markets in Poland, Hungary, Turkey, Germany and the USA. The company is one of the most important Czech businessmen with investment certificates.


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