Investment Advice 2007: World Markets Outlook

Abstract:
As long as the Fed keeps inflation under control and global markets maintain their strength, all indicators point to stocks, since stable to higher interest rates will make it a tumultuous year for bonds. My investment advice is to think big, and think global.
Text:
With inflation under control and strong global economic markets, most investors are going to focus on stocks, and rightly so. With interest rates likely to remain steady or rising, bonds are in for a rocky ride. This is the investment advice and the outlook you’ll want for the coming year.
For United States investors, the Fed will play a key role in reigning in inflation, and rates are likely to remain stable or rise slightly, but not high enough to impede growth, profits or stock values in general. It should be noted that small-cap stocks pose a risk due to the necessity of lending and potentially chasing interest rates, while large- and mega-cap equities, fresh off record profits in some cases, have considerable stockpiles of cash for mergers and acquisitions. GE has already announced four acquisitions in January’s opening weeks. Look for a record year for consolidation, with mergers and acquisitions throughout the financial, technology, and retail sectors.
The housing market is likely to hit bottom by the beginning of third quarter, but the most common investment advice is to stay away from housing stocks and REITs, since the effect will be localized to the sector. Many of the biggest players in the housing market have already seen substantial losses. Most economists feel that real estate has not bottomed out yet, as demand is not supporting current valuations. Though some see this as the prelude to a larger recession, it will likely not come to pass, provided business investment starts to take the reigns from consumer spending.
In Europe, the strength of the Euro has most economists predicting very positive returns, and falling unemployment and higher wages are bolstering consumer confidence and spending. Interest rates will likely rise to control inflation, but, like in the United States, increases are not likely to impede growth.
Indeed, most seeking investment advice will hear that Eurobonds are going to have a rough year when compared to European equities.
In Japan, stagnant wages and a weak yen have led to decreased spending, but exports remain positive. The Bank of Japan is not likely to raise interest rates until at least the second quarter, as consumer spending increases, but current levels (0.25%) are unsustainable for the long-term.
Russia, Latin America, and the emerging markets in Asia that led the way for the past two years are expected to perform well, though most have increased risk due to higher valuations. Emerging Asia and South America appear to lead the way, as risky investors seek repeat performances. Profits are expected to slow down, however, as the market becomes more clearly defined and growth becomes more costly. But most believe that valuations are still reasonable, with notable exceptions. There are, of course, small companies that haven’t yet realized their potential in such economies as India and Brazil, but our investment advice is to play individual stocks in emerging markets cautiously. Emerging European countries such as Turkey will likely see interest rate hikes, but most of Emerging Asia and Latin America is said to be stable.
Overall, it’s likely that the back-to-back years of high profits (record profits in some cases) give an advantage to large-caps worldwide, though equity levels have been outperformed by small- and mid-caps by investors seeking higher risk and returns. Strong earnings in the first half of the year should pave the way for strong stock returns by the third and fourth quarters. Conversely, look for under-performing small- and mid-cap stocks, which are attractive acquisitions for cash-heavy blue chips. Of course, credit risk is a factor with smaller companies, but there will be some obvious buys, with strong balance sheets and earnings growth.
The wild card is oil, which is threatening a drop below $50 a barrel. If oil drops as low as $45, it would likely trigger higher consumer spending, offsetting the effect the poor housing market may have, and increasing the growth throughout emerging markets.
It appears that it’s time for a very conservative portfolio market-cap wise to perform better than the small-cap-heavy portfolios of the past few years. Mutual funds focusing on global large-cap and slow growth companies will likely do well vis-a-vis the emerging markets hotshots.
Of course, any investment advice is subject to change on a moment’s notice, so it’s important to take these observations not as investment recommendations, and to maintain the portfolio strategy you have defined with your investment adviser.
The best investment advice for 2007? Keep your ear to the ground and your eyes peeled.

Article Source: http://www.diyarticlelibrary.com

Bob Collier is an editor for an www.stocksandmutualfunds.com/ investing guide with an extensive www.stocksandmutualfunds.com/broker-comparison-chart.html online broker comparison.

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