Investors have reason to feel cautiously optimistic as they look to 2010, says fund manager
Threadneedle.
The global economy will continue its gradual recovery over the next twelve months, helped by the superior growth prospects from the emerging economies, says fund manager Threadneedle, even though the company is below consensus in its economic growth forecasts for developed economies
"We are forecasting a low nominal growth environment in the developed world," says Sarah Arkle, Threadneedle's Chief Investment Officer.
"There is significant excess capacity in the major economies, so we don’t expect inflation to be a problem, even though year-on-year energy price comparisons may lead to a short-term increase in Q1 [of 2010]."
Threadneedle anticipates that despite the low growth, low inflation conditions there may be sporadic concerns about either inflation or deflation.
Against this backdrop, interest rates are expected to stay low in the major economies throughout 2010, supporting liquidity at healthy levels. However, the current extreme stimulus measures will ultimately need to be scaled back, with implications for investors.
"
Quantitative easing will be reduced in 2010, and this will remove a significant buyer from government bond markets," states Arkle. "As a result, there could be upward pressure on government bond yields".
In terms of asset classes that should do well in 2010 Threadneedle currently favours
high yield bonds because of their shorter duration characteristics and the protection that the spread offers at a time when the company is cautious about government bonds.
Threadneedle says it was quick to buy investment grade corporate bonds in 2009, but credit spreads have fallen a long way, creating some interesting valuation anomalies between equities and corporate bonds.
"We now have a situation where the dividend yield on many good quality companies' shares is higher than the corresponding corporate bond yield," Arkle points out.
"Asset allocation flows are likely to favour equities over corporate bonds in 2010 and we see particularly good opportunities in a number of higher-yielding equities."
Within Threadneedle's equity portfolios, a major theme is the superior growth profile of the developing world. "In countries as diverse as Brazil, Chile, China and Turkey we see growth recovering sharply from the external demand shock of 2008 and 2009," enthuses Arkle.
"These economies are the mirror image of the developed world: they often have healthy financial systems and low levels of consumer debt. With interest rates at historic lows, we believe we’re at the beginning of an extended credit cycle in emerging markets, and this creates excellent opportunities in sectors exposed to discretionary spending by consumers, financial services and real estate."
Finally, Arkle predicts continued interest in commercial property in 2010. "We have seen a bounce back in capital values over the past few months, and this is likely to continue into Q1," she explains.
"However, over the longer term income is the main driver of property returns and, with interest rates staying low, it is income that will attract investors to the asset class," she explains.
"Yields at current levels make property an attractive option for income seekers and we do not see this changing in 2010."
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