Economic data in the US is pointing towards a double-dip. Initial unemployment claims rose to 500,000 last week, a level usually associated with a recession. My bet is the Obama administration will step in. Many things could still go wrong even with a stimulus 2.0; deleveraging by consumers of the western world is one big problem. Perhaps a bigger problem is the persistently high energy costs. Oil continues to hover between USD70 - 85 / bbl even when demand is sluggish. It suggests that Peak Oil has already passed.
Even if the western world escapes from a double dip in 2011, they will struggle with stagflation that year. The rest of the world, especially commodity exporting countries like Russia, Australia, Canada, Brazil, Middle East, rest of Latin America and Africa should slowly emerge as the strongest economies. I'm not too sure about other commodity importing, large economies like China and India. Their economies will grow at between the western world's 1 - 2% and commodity world's 5 - 8%. China and India will probably be grapplying with inflation too, although their growth is much better than the western world's.
Then there's the pension funds in the western world starting to redeem their funds to pay for the baby boomers' pension liabilities. There will be a lot of selling between now and 2012.
Equities don't rise very much during periods of stagflation. I believe only the commodity countries and BRIIC will experience any upside in equities.
Meanwhile, the short term outlook is negative for the next 1 - 3 months. I don't expect equities to fall by more than 20%. The Credit Spreads are surprisingly holding steady. If stocks in MSCI Asia ex Japan falls by more than 10%, I'll start to buy again.
I like the commodity sector. M&A will drive stock prices in the next few years.Mining companies find it safer and cheaper to acquire small competitors instead of the more risky exploration business. Oil rig manufacturers will find a booming biz. The Asia consumer story is also very real. Companies in gaming, retail, fashion and food will do very well. Tech companies that rely on consumer spending should do well. Corporate spending on tech will be very niche. I'm not too bullish on property stocks because I don't think home prices will rise next year over Asia. Office and retail properties may triumph. The automotive sector with exposure to Asia ex Japan should fly through the roof.
