Ahead of the New Year, I thought I'd share this space this week with our entire Global Gains research team to reveal the major issues we think will affect investors next year. Agree, disagree, or think we're missing one? Add your comments below. And with that, here are our 3 Global Predictions for 2011.
Nathan Parmelee: It's no fun prognosticating about economic catastrophe (well, maybe a little), but unless the EU comes up with a more comprehensive way to correct its economic imbalances, my prediction is that Spain is set to follow the tragic economic path of Ireland and Greece. Yes, Portugal may face the same fate earlier, and make more headlines at first, but Spain is the country investors ought to watch. The Spanish economy is likely too big for the joint IMF-EU bailout fund created earlier this year to handle. Its GDP is twice the size of Greece, Ireland, and Portugal's combined, and the first two have already taken a sizeable bite out of the fund.
Spain is making headway in cutting its budget deficits, but it's not growing its economy, and unemployment remains high. In other words, Spain isn't making its economic hole much deeper, but it isn't digging its way out, either. As in Ireland, the bond market reacted by pushing Spain's cost of borrowing higher. In a bond auction earlier this month, Spain's 10-year government bond yield was 5.4%. With the U.S. 10-year treasury rate at 3.3%, the 2.1% difference might not sound like much, but its regional savings banks -- known as cajas -- are hurting. If financing costs are increasing for the Spanish government, they're increasing for the country's banks, too.
This also means that Banco Santander (NYSE: STD) and BBVA (NYSE: BBVA) are facing higher financing costs. So while they do have growing businesses in Latin America, they should be avoided.
Tim Hanson: I thought it might be bold to predict sustained $100 oil in 2011, but a quick check of Google reveals that this is a near-consensus position. The geniuses at Goldman Sachs are predicting a $100 average price for 2011 and a $110 average price for 2012, and the futures market (provided you believe in the wisdom of crowds) is bidding up the right to buy oil for $100 per barrel at the end of 2011. Well, I'll do both Goldman and the futures market one better and predict that we'll see oil get above $110 per barrel next year. That's because, on the supply side, I believe that the secretive producers that compose the OPEC cartel, notably Venezuela, are misrepresenting their production potential, that the sustained higher output from Iraq that the Iraqi oil minister is predicting is a pipe dream (pun not intended), and that it will prove difficult to extract oil from volatile regions such as Africa, where much of the recent growth in global reserves is coming from, according to BP's 2010 Statistical Review of World Energy.
On the demand side, although global energy consumption declined 1.1% in 2009 because of widespread recession, that is a blip in the larger energy demand story. And while some notable investors such as Jim Chanos are continuing to repeat predictions that China's property bubble will burst next year (and if it doesn't, then the year after that) and drag the country's economy down with it, my prediction is that China's economic growth will remain among the fastest in the world. That's because, as a recent IMF working paper showed, China's real estate bubble is largely isolated to wealthy tier 1 markets such as Beijing and Shanghai. And while prices in those markets likely will drop in the future, not only can consumers in these markets tolerate property price declines, but also, these markets aren't the long-term engine of China's economic growth. That engine is in China's inland regions, where rising living standards and ongoing infrastructure investment mean that China's economy will continue to grow and consume more oil. Even in a down year for the world, Chinese oil consumption was up 6.7% in 2009, and it will continue to grow in-line with Chinese GDP.
This is great news for companies such as CNOOC (NYSE: CEO) that have been actively acquiring global energy resources, as well as for companies such as Canadian Natural Resources (NYSE: CNQ) that own lots of less conventional reserves, which cost more to extract and therefore are much more profitable in a higher-priced oil environment. Do with that information what you will.
Nate "the Snake" Weisshaar: I have a quiet confidence in the U.S. economy next year. Unemployment won't improve much, but small businesses seem to have found the bottom, and we should see some strengthening there in the second half of the year. Globally, however, I have a darker projection.
Food inflation will rear its ugly head again, which will not only lead to rises in agricultural commodity stocks such as PotashCorp (NYSE: POT), but also lead to rising interest rates in countries such as China and India as governments try to get a hold of inflation. It will also likely lead to capital restrictions in countries that don't already have them (think Brazil). All of this will likely lead to a greater slowing of the global recovery than people are expecting, which could trigger a sell-off of riskier assets and another rush back into the dollar. If this comes true, our upcoming trip to Australia will prove to be premature, as we will be there too early to see firsthand what happens when China's economy stalls and its hunger for commodities trails off, taking companies like Rio Tinto (NYSE: RIO) and BHP Billiton (NYSE: BHP) – aka the drivers of Australia's economy -- down with it.
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