In a recent strategy note Andrew Garthwaite of Credit Suisse covered what he believes are the biggest risks heading into 2011. On the whole, Garthwaite believes all 5 risks are manageable, which contributes to their expectations for 13% gains in the S&P next year. The 5 risks and the CS opinion of each is attached:
- Chinese inflation (as above), which we think is manageable until we see a sharp rise in export prices;
- Peripheral Europe. Critically, we think even under a severe private sector de-leveraging scenario, Spanish government debt to GDP would only rise to 100% by 2014E which would make its funding arithmetic sustainable, provided fiscal policy is tightened by another 2% of GDP (which should be politically possible). We think core Europe will continue to support peripheral Europe (the cost of it not doing so would be at least $500bn on our estimates); the European Financial Stability Facility (EFSF) is likely to be extended and the ECB is unlikely to withdraw from the policy of providing unlimited liquidity to the banks. Peripheral Europe needs Germany’s economy to grow well above trend (after all it is 50% larger than the periphery) – and that, we think, will continue to happen.
- The inventory rebuild has been extreme: normally, a reversal of an inventory rebuild of this magnitude is associated with a slowdown in growth. Yet, the level of inventories (to sales) is not extreme and there should also be a positive surprise to domestic demand, which again limits de-stocking;
- Fiscal overkill. Yet, we estimate fiscal tightening now accounts for just 1% of GDP globally in 2011 and is being watered down; especially now that the Bush tax cuts have been renewed.
- Contraction in lending. Yet, US bank leverage is already close to a 30-year low and US and European bank lending conditions are consistent with a pick-up in loan growth.
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