Emerging markets spearhead rising stocks this year

Booming emerging markets will spearhead any further rise of global stock indexes in 2012, as the growth spurt enjoyed by some major Western markets since the start of the year peters out, Reuters polls found on Thursday. Following a torrid 2011 that wiped trillions of dollars off global bourses, the 380 equity strategists surveyed over the last 10 days were generally in upbeat mood following an exceptionally strong start to the year.
All of the 20 top stock indexes from developed and emerging markets are expected to finish this year with solid gains, led by the likes of Russia, Japan, Brazil, India and China. An easing of the euro zone debt crisis, helped at least for now by over a trillion euros pumped into the banking system by the European Central Bank over the past three months, was behind the increased confidence in stock market performances this year.
Overall, the full-year outlook for all indexes except Australia and China has been revised up since the December poll. But equity strategists are a notoriously optimistic bunch, and many were badly wrong-footed by last year's disastrous showing for global stocks. The latest poll at least hinted of some lean months ahead for some major rich world markets.
Many European and North American equity indexes have jumped sharply higher since the start of the year, but there was a general feeling among analysts that these rallies have run out of steam for now. "The idea is that markets are currently overextended and will see some correction," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.
"If in the base scenario economic growth improved in the second half, markets may go higher again. Japanese shares top the charts for performance so far in 2012, having gained almost 20 percent. Analysts expect the Nikkei to keep gaining, albeit at a slower pace from here, finishing the year up 30 percent and snapping a two-year losing streak lengthened by the effects of the disastrous earthquake and tsunami in March 2011.
But Moscow's RTS Index should see the biggest full-year rise this year at around 38 percent, boosted by the rally in oil prices, after shedding a fifth of its value in 2011. Not far behind will be the Brazilian Bovespa, which is expected to hit an all-time high after an expected 32 percent gain for 2012. Like the RTS, the Bovespa index lost about a fifth of its value in last year.
German shares have almost kept pace with their Russian, Brazilian and Japanese counterparts so far this year, but analysts do not expect the DAX index to keep this up, likely gaining only around 3.6 percent from here to year-end. The DAX's stellar rise has also coincided with the European Central Bank's decision to pump more than 1 trillion euros into the financial system using cheap, three-year loans since December.
French and Italian shares have also had a brisk start to the year. "Based on the assumption that the euro zone economy is on the verge of a recession, there is only limited upward potential for broad-based euro equity indices," said Hans-Peter Rathjens, economist at Allianz Global Investors. Economists reckon the euro zone economy will shrink around 0.3 percent this year, even if its sovereign debt crisis is showing signs of easing.
A subsequent flare-up of the debt crisis would probably depress global stock indexes, much as a it did in 2011, and that scenario remains one of the key risks for analysts in the poll. American shares have also enjoyed a significant upsurge since the start of the year, coinciding with signs of a strengthening US labour market and an improving economy.
But having gained almost 12 percent so far this year, the poll showed the S&P 500 won't rise much more this year. "All the talk about the economic outlook having improved will start to dissipate. You've already seen some evidence of pressure on the lower-end consumer; things like food sales have been pretty soft," said Barry Knapp, chief market strategist at Barclays.
Unlike US and European shares, which have started the year well but look set to slow markedly, analysts think a blistering few months lie ahead for China's SSEC index. It has gained only 2.4 percent this year, constrained by real weakness in the Chinese economy, but respondents expect it to rocket 21 percent between now and the end of the year, ending the year around 24 percent higher.