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From UBS’ Maury N. Harris:

The surge in payrolls in January provides further evidence that a virtuous cycle of economic activity is beginning to take hold. We have increased our outlook for Q1 2012 real GDP growth to 2.3% from 1.5%.

This is a function of increased consumer spending emanating from pent-up demand and a better labor market and credit conditions. It also reflects expectations that Federal government spending will rebound after plunging in Q4 2011. Risks remain: Europe has n.ot been “solved”. Faster growth and the recent rapid decline in labor force participation have caused us to revised down our estimate for the unemployment rate by year-end: we now expect a 7.9% rate versus our previous estimate of 8.6%.

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For some time, economists had argued that Russia — which just had its ratings outlook downgraded by Fitch — be removed from the BRICs classification and be replaced by Indonesia.  Early last year we made the case for Indonesia.

Lately, some are suggesting that Indonesia replace India, which had a terrible run last year.

These arguments in favor of Indonesia aren’t without merit. Despite its inflation woes, the country has a strong labor market which could drive consumer spending.  Also, business confidence is high.  Going into 2012 Deutsche Bank economists expect the country to grow 6.3%.

Now, Moody’s has upgraded Indonesia’s sovereign rating to Baa3, from Ba1.

Indonesia’s upgrade was based on the resilience of its economy to external shocks, its policy buffers to address financial vulnerabilities, a healthier banking system and government financial metrics in line with Baa peers. From the release:

Indonesia’s cyclical resilience to large external shocks points to sustainably high trend growth over the medium term. A more favorable assessment of Indonesia’s economic strength is underpinned by gains in investment spending, improved prospects for infrastructure development following key policy reforms, and a well-managed financial system.

In addition, robust growth has been accompanied by the continued health of its external payments position, supported by increasingly large flows of foreign direct investment, while inflationary expectations are becoming better anchored at a more stable and historically lower level. 

Prudent fiscal management has contained budget deficits at very low levels and has reduced the government’s debt burden as a share of GDP.

As a result, Indonesia’s fiscal ratios now surpass many of its higher-rated peers, providing more fiscal headroom to respond to economic shocks. It has also reduced risk perceptions, enabling the government to access international funding markets even during periods of heightened risk aversion.

Policy buffers, including the central bank’s large stock of foreign exchange reserves and the government’s bond stabilization framework, have been recently deployed and remain ample as significant lines of defense against destabilizing capital outflows. In addition, the banking sector does not pose immediate or significant contingent risks to the government’s balance sheet, thereby raising fiscal headroom and added scope to policy responsiveness to future shocks.

Issues related to governance and a fundamental assessment of institutional strength remain a concern in regard to a further improvement in Indonesia’s credit fundamentals. In addition, continued progress on targeted subsidy reform would be credit positive.

The stable outlook also reflects the expectation of continued policy flexibility and the adept management of risks stemming from global financial market volatility, based in turn on the tepid recovery in the US and the ongoing sovereign debt stress apparent in the euro zone.

Indonesia’s long-term foreign currency (FC) bond ceiling was also raised to Baa2 from Baa3, while the long-term FC deposit ceiling was aligned with the government bond rating at Baa3. In addition, the short-term FC bond and deposit ceilings were upgraded to P-3. The outlook for these ceilings is stable. These ceilings act as a cap on ratings that can be assigned to the FC obligations of other entities domiciled in the country.

The local currency bond and deposit ceilings were also upgraded to A3 from Baa1.

Don’t Miss: Emerging Markets – This Is What Will Happen In 2012 >

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The last time we heard from SocGen’s Albert Edwards was back in November when he re-dubbed the BRICs as “Bloody Ridiculous Investment Concepts.”

Well, it seem the permabear is now out of hibernation.  Earlier today, SocGen hosted an event titled “2012: The Final Year of Pain and Disappointment.”

If you’re a glass-half-full type of person, then you might think this means SocGen is optimistic about 2013.

But if you think it seems odd to put “Albert Edwards” and the word “optimistic” in the same sentence, then you’re right.

You see, Edwards expects 2012 to be particularly horrific for the global economy.  Here’s what he said (via The Guardian’s Larry Elliott):

There is a likelihood of a China hard landing this year. It is hard to think 2013 and onwards will be any worse than this year if China hard-lands.

Edwards warns that China no longer has the financial capacity to sufficiently stimulate its rapidly slowing economy.

Regarding the U.S., he believes the risk of recession is high.  According to The Economist, Edwards attributes recent strong data, such as consumer spending, to the falling savings ratio, which he argues isn’t a sustainable practice.  He also cited Lakshman Achutan and John Hussman, who both subscribe to the ECRI’s recession call.

Edwards has been bearish for quite a while, and he has a tendency to push back his forecasts when they don’t materialize.  Will this be the year Albert Edwards is right?

SEE ALSO: 11 Quotes From SocGen Uber-Bear Albert Edwards That Scared The Crap Out Of Us In 2011 >

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Jefferies’ Chief Global Equity Strategist Sean Darby has published his outlook for U.S. equities.

He argues that U.S. equities will outperform every other financial asset classes as well as most other global equity indexes.  He see the S&P 500 generating double-digit returns, and in Q1, he expects the S&P 500 to trade between 1,100 and 1,322.

His strategy note, titled The Return of US Competitiveness, highlights the increasing competitiveness of U.S. manufacturing relatively to other low-cost countries like China.

This is a sentiment shared by Citi’s Tobias Levkovich who, like Darby, describes this trend as a “renaissance.”

Here’s a summary of Darby’s outlook and assumptions:

We expect US equities to outperform treasuries, commodities and precious metals as well as other global equity markets in US$ terms. We forecast US GDP growth in 2012 to accelerate from 2011, with GDP growth averaging 2.5% per quarter. Economic growth in 2012 will continue to depend upon a combination of moderate consumer spending and investment capex — primarily equipment and software — as the primary sources of growth. Monetary policy will remain very accommodative and the Fed will probably implement a QE3 that features MBS purchases. We anticipate almost double digit returns for the S&P 500 (excluding dividends) with range trading markets for most of the year (for S&P 500 1,322 to 1,110 in 1Q 2012). Earnings growth will be modest but margins will likely remain stable. Sector rotation will be increasingly important as the S&P 500 attempts to break out of its 200 and 250 day moving averages. We believe consensus has underestimated how competitive the US economy has become and the rebalancing of growth towards the real economy. We also highlight sector scenarios based on seasonality and the forthcoming US election.

And here’s what he sees being a key driver to equity returns relative to other assets:

US equities offer the most attractive risk return compared to bonds, commodities and high yield debt, in our view. While equity relative valuations are attractive for equities against other financial assets, a reversal of flows out of income and commodities are the most likely catalysts for share price appreciation, in our view.

Here’s a look at how Darby expects the S&P 500 to trade this year.

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American economist Tyler Cowen said “the current economic deterioration of India is the single most important under-reported story these days”.

Despite the countries status as an emerging market, India’s economy is looking at a slower pace of growth next year as it isn’t immune to the global economic slowdown.

In fact Morgan Stanley recently cut its 2012 global GDP forecast to 3.5%, down from 3.8%.

High inflation, capital flight and a lack of reforms to drive foreign investment are weighing on the economy. Morgan Stanley now expects the Indian economy to post 6.9% growth in 2012, down from earlier expectations of 7.2% growth.

GDP growth is expected to decelerate next year to the lowest level since the financial crisis

GDP Growth

• 2011: 7.30%

• 2012: 6.90%

• 2013: 7.50%

• 2014 – 2018: 8.5%

 

Source: Morgan Stanley

A slowdown in growth for more than 3 or 4 quarters could be problematic

An easing in domestic demand, and weak external demand because of the global economic slowdown, could see GDP drop to 6.2% in 2012. But analysts are more concerned about the duration of the slowdown, and would like to see it restricted to three or four quarters.

Source: Morgan Stanley

Consumer spending which fell from 2010 to 2011, is expected to decline because as high inflation erodes purchasing power. Income growth is also slowing

Consumer spending:

• 2011: 6.40%
  

• 2012: 6.30%
  

• 2013: 7.60%

 

Source: Morgan Stanley

See the rest of the story at Business Insider

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