Asia will spearhead the rise in global stock markets from now until the end of the year, according to a worldwide Reuters poll that showed only modest gains ahead for North American and European shares. Respondents also showed they expected the US Federal to stem its asset purchase programme rather than stop it completely, probably in the second half of this year.
The world's top stock indexes have had a fairly mixed year so far. A breakneck rally at the start of the year gave way to angst when the Fed hinted it might start pulling back its quantitative easing asset buying, cash that has inflated share prices globally. Still, the vast majority of the more than 250 analysts and investors polled this week predicted equities will continue to rise, if only because they are one of the few assets that can still generate a decent rate of return.
The poll's respondents have had a patchy record of late, however, having failed to predict a disastrous 2011. They were also too optimistic about 2012. Japan aside, Asian shares have performed among the worst of the poll's 22 indexes covered, and the fact analysts expect them to recover strongly from here as much reflects an element of playing catch-up, as it does confidence in these markets.
Some 94 percent of all the end-2013 forecasts for Asian stock indexes - including Japan, China, South Korea, India, Taiwan and Hong Kong - project an increase compared with Monday's close. By contrast, the fairly hefty gains in major Western stock markets so far this year are expected to slow markedly. That would at least better reflect the uncertain economic reality of the world's biggest economies, which are still struggling to generate growth - especially in recession-hit Europe.
Still, equity analysts are undeterred. "The underlying story is not really accelerating global growth but more asset reflation, and the fact that equities are by far the most reasonably priced asset class, the only one with positive real prospective returns," said J.P. Morgan strategist Emmanuel Cau.
The flow of easy central bank cash has pushed up both equity and government bond prices, leaving only negligible, or in some cases even negative, yields on those bonds and making shares more attractive. Fifty-seven out of 70 analysts who answered an extra question said they expected the US Federal Reserve to start reducing the scale of its money-printing stimulus, with most of them expecting that will happen before the end of the year.
The remainder said they expected the Fed to keep going with its asset purchases, which currently stand at $85 billion per month of newly-created money. "The biggest headwind for the market will be any rumour of tapering, while clarification from the Fed is one of the biggest potential tailwinds," said Kristina Hooper, head of portfolio strategies at Allianz Global Investors.
Japan's Nikkei, already up by a stellar 25 percent this year, is expected to rise quite a bit more, topping the table of the expected best performers in the poll with a projected 51 percent gain in 2013. Respondents cited a weaker yen and Prime Minister Shinzo Abe's radical fiscal and monetary expansion policies, dubbed "Abenomics", as the main reason for such a strong performance.
"Abenomics' first arrow, or monetary easing, has been successful as it has fixed the excessively strong yen, and as a result it will lift company profits," said Masayuki Kubota, senior fund manager at Daiwa SBI Investments. Other indexes in emerging Asia have not fared so well, but hopes of an economic recovery and attractive valuations should ensure Chinese, Hong Kong, South Korean and Indian shares will finish the year up strongly.
Their Latin American peers have endured a torrid 2013, with Brazilian stocks more than 19 percent in the red so far this year - easily the worst performer as economic conditions there deteriorated. Although analysts largely expect better days ahead for Brazilian shares, there was a lot of uncertainty in the poll. "To be honest, it's hard to forecast, considering there are many variables we are encountering now," said Rafael Castro, a trader with brokerage H. Commcor in Sao Paulo.
"If the weakness in the economy continues, if the central bank isn't able to create more confidence in the market, we are just going to fall further." In Europe and North America, analysts saw only limited upside for equities from here, although fewer than a fifth of all forecasts predicted a negative return between now and the end of 2013. "While the bull market isn't over yet, we do see limited upside at these levels," said Savita Subramanian, head of US equity and quantitative strategy at BofAML Global Research.
The US S&P 500, which has surged just shy of 15 percent this year, is expected to gain modestly from here until year-end, roughly 4 percent. Similarly, most major European indexes are expected to add around 4 to 5 percent before the year is out, with London-listed and German stocks faring best so far in 2013.
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