One of the most widely quoted financial experts in the world is predicting that global stocks markets will be higher by 25 per cent in 2012 than they are today, if Europe were to act appropriately to resolve its sovereign debt crisis. That prediction was made by Jeremy Siegel, the Russell E Palmer professor of Finance at the Wharton School of the University of Pennsylvania, in an interview with the Sunday Guardian. "If Europe acts, the stock markets will be 25 per cent higher (in 2012). If Europe does not act, I think the US will still be five to ten per cent higher (in 2012), but Europe will be stagnant.
"I think alot depends on whether we see that the worst part of the European crisis has passed. If that happens, we will have a huge world-wide equity bull market," said Siegel, who has developed a reputation for his bullish stock market predictions. Siegel, who has a PhD in Economics from the Massachusetts Institute of Technology, is due to deliver the feature address at a one-day seminar at the Hyatt Regency Hotel on Wednesday and will speak on the topic "The Future for the Investor." Speaking on Friday at the end of a week in which global stock markets had their best performances in more than two years, Siegel said that US stocks represented very good value for the long run but were being contrained by events in Europe.
'The big fear is Europe'
"The macro-economic fundamentals in the US stock markets certainly support a big rise in the stock market. "The big fear is Europe. They made some promising progress this week in Europe, but I am not yet convinced that they have done all that they need to do to prevent a crisis there," said Siegel. Last week, the Standard & Poor's 500 index was up by 7.4 per cent for the week, its biggest gain since March 2009, while the Dow Jones industrial average ended the week higher by 7 per cent, its largest weekly gain since July 2009.
Asked what he thought were the chances that the Europeans would get their act together, Siegel said: "They will eventually. The question is whether it's sooner or later. If they wait quite a while, they will go into a worse recession. If they do it right away, the recession that they are virtually in now, will be very mild." European nations-including Greece, Ireland, Portugal, Spain and Italy, all members of the 17-nation euro zone-are all facing debt crises, with many analysts fearing that their economic problems could lead to the dismantling of the currency union. He said he was convinced that Europe will act to solve its problems because Germany-Europe's largest economy and one of the largest exporting nations in the world-will be hurt by the continuing crisis.
The solution for Europe, according to Siegel, is for the European Central Bank (ECB) to guarantee the deposits of the continent's banks, ensure that the region's financial system is properly lubricated and recapitalise or restructure some of their weaker banks. The professor said: "The system has to hurt Germany enough for them to make that decision. They also have to bring the euro down and lower interest rates. Once they see that this is impacting their own economy they will have to step up."
Stop run on European banks
He said the solution of providing a backstop to European banks will not cost a great deal of money, stressing that he was not referring to bailout of countries like Greece, but ensuring that banks do not run short of liquidity. "The problem right now is that people are taking money out of the banks and...they have to stop that run on the banks in Europe." He said if Europeans fear that their money is not safe in their banks, that is a "very dangerous situation," pointing out that some European financial institutions are becoming hesitant to issue letters of credit and trade credits. He said that if the ECB were to provide guarantees to the banks, he envisages a 20 per cent jump for European equities.
Asked how useful he though last week's intervention by six of the largest central banks in the world was to helping the European crisis, Siegel said: "That's a start. It was a 50 basis point cut on the swap rate for the dollar deposits but the truth is the risk premiums are still there." On Wednesday, in a coordinated action, central banks from Europe, the US, Britain, Canada, Japan and Switzerland intervened to make it easier for banks to get hold of the dollars they may need. While he said that he did not know enough about the local stock market to make predictions about T&T shares, Siegel said emerging market currencies are likely to strengthen against the US dollar next year as they weakened in the last three months.
The T&T Composite Index is up by 20.82 per cent for the year to date. Asked about the prognosis for investments in US dollar, fixed income instruments, Siegel said: "Once the economy improves, I think you are going to see interest rates going up. So high quality, fixed income instruments will not be well in a rising interest rate environment."
