Saturday, November 14, 2009
Bloomberg
NEW YORK -- China's surging asset prices, a dollar "crisis" and oil prices above US$100 a barrel are among the "tail risks" that investors face in 2010, said Bank of America Corp.'s chief global equity strategist Michael Hartnett.
Rising Chinese equity and real estate markets and the government's "stubborn refusal" to revalue the yuan could fuel "liquidity-driven speculation" and inflation expectations across emerging markets, Hartnett wrote in a note to clients obtained Thursday.
The Shanghai Composite Index has climbed 74 percent this year as record lending and government stimulus spending helped drive the nation's economic rebound.
Tail risks are unpredictable; low probability events that can have a "meaningful impact" on investors' portfolios, he said. Other events include a "double-dip" recession, growing protectionism, a debt default in Japan and recoveries in U.S. housing and the American consumer, he wrote.
Hartnett said Bank of America's "base case" is for global economic growth to accelerate next year, low inflation, a slow withdrawal of policy stimulus and equities and commodities to outperform bonds and cash.
A weaker dollar and quickening U.S. inflation could push oil prices "well above" US$100 a barrel, Hartnett said. Investors should hedge against inflation by buying gold, commodities and emerging-market equities and currencies, he said.
"There is plenty of evidence that asset markets are still far from normal and that investor confidence remains fragile," Hartnett wrote. "Perhaps the best symbol that investors believe we still live in a world of fear and loathing is the huge popularity of gold."
