Equities to rebound: Prudential

Financial markets will continue to improve in 2012, but there are risks that could bring them back down again.

Ed Keon, managing director of Quantitative Management Associates, said that the world is experiencing uncertain times. He pointed out that Europe is his top concern, but noted that China, India and other economies and global hot spots could face major problems in 2012 that could disrupt U.S. markets.

“A stronger-than-expected 2012 stock market is more likely than a very weak one, with U.S. economic data on employment, housing and manufacturing consistently better than expected for months now,” said Keon, speaking at Prudential Financial Inc.’s 2012 Global Economic and Retirement Outlook briefing in New York. “True, some of that is due to temporary factors, and a likely recession in Europe, weak U.S. income growth and ongoing concerns about household real estate are likely to constrain growth in 2012. But the financial obligations ratio is at a generational low, suggesting that on average—even though many families continue to struggle—folks are finding it easier to pay their bills now than they have in a generation. Household de-leveraging might be in the seventh or eighth inning, and the drag from this might be mostly over. And any improvement in Europe could lead to a major rally. So 2012 could look a lot better than 2011, provided the U.S. continues to heal and if—and it’s a big if—other trouble spots don’t bite us.”

Quincy Krosby, a Prudential market strategist, noted that despite the more positive domestic economic landscape, investors will be particularly sensitive to corporate top line revenue growth and guidance.

“Slower European growth, coupled with a stronger U.S. dollar, will impede traction for U.S. markets, but a potential slowdown in hiring and continued weakness in the housing market will probably lead to more Federal Reserve intervention, providing positive stimulus for markets,” said Krosby. “Similarly, European Central Bank action will continue to provide liquidity—and confidence—for markets.”

For global markets, John Praveen, chief investment strategist for Prudential International Investments Advisers, agreed that Europe remains a significant concern, but that attractive valuations, low interest rates, further rate cuts and other liquidity measures, multiple expansion, and healthy earnings growth should help stock markets in 2012.

“Global financial markets and the global economy are likely to remain under the shadow of the continuing Eurozone debt crisis in 2012,” said Praveen. “Global equity markets are likely to struggle in a volatile 2012 but eke out modest gains. Further, U.S. and Emerging Market stocks are likely to outperform Europe and Japan.”

In the fixed income markets, Michael Lillard, chief investment officer of Prudential Fixed Income, said that despite the 2011 bull market in U.S. Treasuries, he believes there is still value, particularly corporate bonds, emerging markets debt and select structured products, and expects the credit sectors to dramatically outperform government debt in 2012.

“Fundamentals in the U.S. investment grade and high-yield bond corporate sectors remain healthy overall, and yield spreads over U.S. Treasuries are generous for this stage of the credit cycle,” said Lillard. “Emerging economies continue to offer value, supported by improving sovereign creditworthiness, productivity growth and investment flows. Volatility will likely remain high, however, due to bouts of risk aversion in response to the European crisis and a potential slowdown in global growth.”

Harry Dalessio, senior vice president for strategic relationships at Prudential Retirement, says the likely environment of slow growth, low inflation, low interest rates and volatile financial markets described by Prudential’s market experts will continue to challenge investors in their pursuit to reach their retirement goals.

“Although the worst recession in a generation is technically behind us, it likely doesn’t feel that way to many individuals,” said Dalessio. “Contributions to defined contribution retirement plans are lower than pre-recession levels, and the number of people taking withdrawals is near record highs. Therefore, 2012 is also likely to be a period where new approaches and solutions to help will be needed more than ever.”

Prudential Financial, Inc. has operations in the United States, Asia, Europe, and Latin America.

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