Saturday, January 8, 2011


From Pragmatic Capitalism:
Like most of the big banks and research firms Morgan Stanley is pretty optimistic about 2011.  Their macro outlook was recently summarized as follows:
“US growth should accelerate, and double-dip and deflation risks are low. In relatively short order, the outlook for the US economy has improved quite significantly. The surprise agreement, when gridlock was expected, to extend the expiring Bush tax cuts and unemployment benefits, along with other fiscal stimulus measures, has raised our US economists 2011 GDP forecast to 3.6% from 2.9%, provided the legislation is passed. They also see a modest uptick in inflation to 2.1%, from 1.7% in 2010. A key pillar in this improving growth outlook is exports. In October, exports surged 3.2% over September, and should contribute 3.2% of the 4.2% GDP growth in 4Q10. Looking forward, the strong growth in EM bodes well for US growth, as it accounts for an increasingly large share of US export, a reflection of global rebalancing.”
Within this bullish argument they’ve provided 5 investment themes for the upcoming year:
“Positive base case, asymmetric downside: Relative to a reasonably positive base case, it’s hard to see the upside to the bull case being much better, given the many structural headwinds that remain in DM and valuations that are not as attractive as they were at the start of 2010. In contrast, the downside is much greater, in our view. The risks are well known: a growth rate in the US hovering around 2-2.5% makes the odds of a double-dip uncomfortably high; sovereign risk contagion to the euro core; and a boom-bust cycle in EM. Failure to address this risks, aside from their obvious negative economic implications, could greatly undermine investor confidence in policy-makers, leading to a sharp correction....MORE