It’s half time in the match and just before the Christmas break “Liquidity and Earnings” have strolled to a three goal lead against the “Wall of Worry”. But how to bet in the second half? Will we see a re-run of the last six months in the next six, or just like Liverpool FC in that memorable Champions League Final, could worries about debt win through in a penalty shootout?
Certainly recent themes could become a running sore in 2010. Greece’s debt downgrade, Spanish debt on negative outlook and here in the UK a pre-Budget Report which in the City’s view completely failed to lay out any detailed plan to cut public borrowing. One commentator, Mark Ostwald from Monument Securities, called it a recipe for a downgrade. “Is it not about time the UK went onto ‘outlook negative’ - why wait for the election?’’ Except of course that’s exactly what they will do. In essence this government is borrowing on the credit of the next, which means no sterling crisis unless the next government is equally weak willed or we get a hung parliament.
But assuming a solid enough majority and therefore a much tougher fiscal policy, there should be some compensation in the form of still loose monetary policy. The Bank of England would find it very hard to raise rates while taxes are going up and spending is being cut. Of course that doesn’t mean gilt yields won’t rise. The Bank of England will finish up its current QE programme in February and pre-supposing there’s no extension, then yields on longer dated paper are only going one way. But for that to become a headwind for stocks they’ll have to reach five per cent and in the short term that looks a stretch.
And then we look for the growth and here we might be pleasantly surprised, not necessarily for the UK but for the rest of the world. Barclays Capital has just issued its forecast for 2010 and reckons global growth will hit 4.2 per cent next year and 4.1 per cent the year after. After a contraction in 2009 and comparatively paltry growth of 2.7 per cent in 2008, this is some return to form.
The global companies who have cut costs so much will only need a little bit of growth to have a big difference on their bottom lines. Add in still relatively cheap money and the first part of next year is unlikely to witness an Istanbul miracle for the Wall of Worry. Liquidity and Earnings should do what A.C Milan couldn’t. Protect their lead and close out a victory for stocks in the first part of the year.
Ross Westgate co-presents Worldwide Exchange and anchors Strictly Money each weekday on CNBC.