FIVE SURPRISES FOR 2012
Byron Wien, the respected Wall Street strategist, issues his annual list of "ten surprises" every January. Our crystal ball is not as clear as Mr. Wien’s, but for fun, we shall mimic his New Year’s tradition and post our five surprises for 2012.
Our five surprises are NOT predications, but are just probable events that we believe have been underestimated.
- S&P 500 Index reaches an all time high: Buoyed by stabilization in Europe and aggressive monetary easings in China, US stocks rally strongly in 2012 and surpass the 2007 S&P 500 high of 1,565. This rally is further reinforced by a reallocation of capital from Treasury bonds into stocks and a growing perception of a recovery in US real estate.
- Beijing props up Chinese real estate market: A perspicuous drop in real estate begins to take its toll on the Chinese economy and local government finances. Beijing further relaxes monetary policies early in the year but cannot offset the economic impact of weakening in real estate transactions and land prices. By early summer, the Chinese government makes an apparent U turn, lowering interest rates and setting policies to reflate the real estate market. Stocks and high yield bonds of Chinese developers advance 50% on this reversal in policy stance.
- Iran conducts a nuclear test: Iran carries out its first test of a crude nuclear weapon. Saudi Arabia then announces its own nuclear weapons program, while the defense minister of Israel indicates that the Jewish state already has an undisclosed nuclear arsenal of its own and would not hesitate to retaliate in the event of an attack. The U.S. publically denounces Iran’s action, but makes secret contact with Tehran to discuss a normalization of diplomatic relations.
- Thousands die in China chemical plant accident: A chemical plant near a major metropolitan city in a coastal region explodes and releases deadly chemical fumes, killing 20,000 neighboring residents and leaving 150,000 permanently paralyzed. The government attributes the accident to human errors and faulty equipment manufactured by foreign suppliers. The Prime Minister cries and offers condolences when visiting the site.Amid public anger, key city officials are removed and tried. Some Internet sites and Weibo are temporarily shut down to “prevent the spread of false rumors.”
- Chinese sovereign fund becomes largest HSBC shareholder: Pressured by escalating capital requirements and narrow interest rate spreads, HSBC seeks China Investment Corporation (CIC) investment. The banking and financial services giant acknowledges that it is essential to have the backing of the Chinese government for it to maintain its global footprint and massive balance sheet.