Ten surprises for the new year in business

10 occurrences this year that are not being expected by financial experts but which will have significant influence over economic events.

An upward revaluation would bring the yuan's value against the dollar back to where it was earlier last year. Petar Kujundzic / Reuters

The primary goal of The Ten Surprises is to explore investment-related events that are, in my mind, probable but would be given only a one in three chance of taking place by most portfolio managers.

My first surprise is that the economy will be stronger than the consensus expects. Most forecasts for real GDP growth are about 3 per cent, with 4 per cent the high. I think the US economy can grow at 5 per cent. In the interest of full disclosure, I have to admit I was looking for 5 per cent last year also and was wrong, but at the end of the year business conditions improved and the economy began to build momentum, driven by the consumer, and by exports and capital spending.

Last year I also thought the unemployment rate would drop below 9 per cent and it ended the year at 9.4 per cent. I believe we will see unemployment drop into the 8 per cent to 9 per cent range this year.

I am more optimistic about the US equity market than most observers. The consensus sees the Standard & Poor's 500 at about 1,400, and I think it could reach 1,500. Operating earnings are expected to reach US$92 (Dh338) to $95 next year, and the market generally sells at 15 times that earnings level at some time during the year.

The market started this year with optimism among investors at extreme levels and we may need a correction of some importance to create a more conservative or cautious mood. The rise last fall began when there was considerable concern about the economy, the US congressional election outcome and its implications, and the resolution of the credit problems in Europe.

Good things in the market rarely happen when everyone expects them. Moreover, if interest rates rise later in the year, stocks could react negatively, so while I believe there is a better than 50 per cent probability that the S&P 500 will reach 1,500, I do not necessarily think it will end the year at that level.

My fourth surprise is that the price of gold will reach $1,600 an ounce. The consensus is that gold could rise to $1,500, and my view is $1,600. The inveterate gold bugs are at $2,000 or higher, and that is certainly possible over time, but I think my target is reasonable for this year.

While the first four surprises are shared by others, the fifth one is not being discussed anywhere to my knowledge. The Chinese finance policymakers have two important problems. The economy is growing too fast (more than 10 per cent) and inflation is too high (more than 5 per cent). They could control both by aggressively revaluing their currency upward. No single policy change would accomplish the two goals as quickly and easily as a currency revaluation.

Since the yuan is tied to the dollar, the decline in the US currency has made the Chinese currency cheaper and exacerbated the growth and inflation problems. For this reason, an upward revaluation would bring the yuan only back to where it was earlier last year. In addition, the Chinese are beginning to think about moving away from pegging their currency to the dollar and perhaps embracing as the world's reserve currency some sort of basket including the dollar and the yuan. Revaluation could be a step in that direction. Back in the direction of the consensus but more extreme, the sixth surprise is that "soft" or agricultural commodities will rise in price more than the consensus expects. I have corn at $8 a bushel, wheat at $10 and soybeans at $16. In each case, I am about $1 above the consensus. My reasoning is that the standard of living is rising around the world and will be reflected in improvement in diets. More meat will be eaten and more grain fed to the livestock that provide it.

There is a great deal of controversy about the housing outlook. Some observers believe house prices could fall another 30 per cent, and the Case-Shiller index of house prices in 20 major markets has been weak lately.

Last year there was no change in the substantial inventory of unsold homes, but this year homes for sale, and those with mortgages in trouble, are likely to be reduced by more than 800,000 units, about 10 per cent of the total. That still leaves many homes waiting for buyers, but I believe we will see a pickup in single-family housing starts from the current level of about 475,000 to 600,000.

In the eighth surprise, I believe the price of oil will rise to $115 a barrel. Those who anticipate higher prices are mostly looking for $100.

I have been a bull on oil for some time because demand from the developing world is expanding rapidly and the ability of the oil-producing nations to increase supply has been modest at best since new discoveries basically have only offset the decline in production of existing wells. The developed world is using less oil, but the low level of consumption in the developing world has been steadily rising as standards of living have improved.

I believe Afghanistan will be included in the troop withdrawal plans for this year, and that is the ninth surprise. It is not clear that our military is making real progress there. The country is basically tribal and is likely to be ruled by warlords again once US troops leave, whenever that day comes.

We cannot create a democracy in Afghanistan that will prevent terrorism on its own. The war is extremely unpopular and the president will want to get US troops out of there before he begins to campaign for re-election in 2012.

The final surprise is that there is no second act in the European financial crisis. The stronger countries - France, the Netherlands and Germany - have considerable loans outstanding to financial institutions in the weaker countries and have a lot to lose if the euro-zone financial crisis deepens.

I believe the banks in the stronger countries will try to reduce their exposure over the next three years. In the meantime, the EU, the IMF and Germany will try to provide transitional aid as the southern tier implements austerity measures, selectively raises taxes and hopefully enjoys some modest growth.

A lot has been invested in the EU, and considerable benefits have been realised, primarily in trade. I don't think any of the major participants are ready to give up yet, and they have the means to ensure survival over the near term.

I look forward to reporting to you early next year on how this year's surprises have worked out, and to coming up with a list for next year.

Byron Wien is vice chairman of Blackstone Advisory Partners. The opinions expressed in this commentary are his personal views and do not necessarily reflect the views of Blackstone itself.