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The possibility of a double-dip recession is clouding forecasts for the coming quarters, even among some of the largest investment banks that generally feel the economy will inch its way back to good health.

Market watchers at UBS AG and UBS Financial Services Inc. say the recovery is slowly shifting gears, moving from one driven by government support to a private sector-led economy. They forecast a "moderate recovery" to continue.

In a report on the global economy led by economist Daniel Kalt, UBS says challenges to global growth such as European austerity measures will be counterbalanced by emerging market growth and very loose monetary policy in most developed economies.

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The seeds of recovery have been laid in the United States, UBS says. Business and consumer consumption has been positive for eight months, individual wealth has inched up as interest rates and inflation have fallen. As government spending cools in the months ahead and taxes rise, the economy risks losing a percentage point of GDP growth. "In our view, the U.S. economy will be able to withstand such an erosion without triggering a double-dip recession," UBS says.

Vincent Delisle, strategist at Scotia Capital in Montreal, is expecting corporate earnings growth to exceed 20 per cent over the next 12 months, as global profits rebound strongly. In June, Scotia notched down its earnings expectations for this year and next, but they still appear significant at 25 per cent this year and 10 per cent in 2011.

Based on a price to earnings multiple of 15, Toronto's S&P/TSX index should hit 12,300 points within the next 12 to 18 months, Mr. Delisle wrote in the September edition of his Global Valuation Monitor report. That would represent a gain of about 4 per cent from Tuesday's close. Using the same multiple for the broad benchmark of U.S. stocks, he has set a target for the S&P 500 of 1,225 points in the next 12 to 18 months, representing a rise of about 17 per cent from its latest close.

Mr. Delisle favours select sectors, principally materials, discretionary, financial and industrials. Although he doesn't see the economy heading into a double-dip recession, he warns that the current economic climate could force a round of negative earnings revisions on companies in the months ahead. "Global equity indices remain vulnerable should U.S. and China GDPs slow down in coming months," he warned.

The stock market is priced for economic growth above 1.5 per cent in the second half of the year. But in reality GDP is probably expanding at less than 1 per cent, according to Venable Park Investment Council Inc. in Barrie, Ont. "There is risk here for considerable disappointment," Cory Venable and Danielle Park warned in their latest newsletter published Tuesday.

Interest rates are near historic lows yet housing supply stands at a 27-year supply. "It seems that governments can lead debt-weary consumers to credit, but they cannot make them consume," they wrote.

They calculate that the S&P 500 index needs to sink to between 800 and 950 points before there is any meaningful rally, and warn that this range wouldn't necessarily represent a lasting bottom.

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