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According to the BofA Merrill Lynch Global Research Macro Year Ahead for 2010, the global economy will grow ahead of consensus estimates in 2010.
BofA Merrill Lynch Global Research is forecasting global GDP growth of 4.4 percent in 2010. Emerging Market economies are expected to take the lead, growing at an anticipated average rate of 6.3 percent while Developed World economies are expected recover from recession and grow at an average 2.7 percent.
The report highlights several reasons for this optimistic, above consensus outlook.
First, after Lehman’s collapse global policy makers adopted a “do whatever it takes” attitude to the economic and financial crises. This has meant not only consistently aggressive monetary and fiscal stimulus, but policies that are repeatedly recalibrated to match the scale of the crisis.
Second, the BofA Merrill Lynch Global Economics team points out that forecasters and investors tend to underestimate the power of the business cycle. During recessions, many sectors of the economy overshoot to the downside and any improvement in confidence results in a bounce in activity.
“We expect the economic recovery to remain stronger than consensus expectations, but still significantly weaker than a normal recovery from a major recession,” said Ethan Harris, head of North America economics and coordinator of global economics.
“With few domestic imbalances, the eurozone can ride the upturn in global manufacturing and enjoy robust growth,” said Holger Schmieding, head of European economics research.
The muted recovery will likely lead to low core inflation, continued soft monetary policy and further quantitative easing, the report says. This outlook favours equities and commodities and signals a year of lower returns for government and corporate bonds.
Equities to benefit from growth
The prediction from BofA Merrill Lynch Global Research of 4.4 percent GDP growth in 2010 spells good news for equities. Global stock markets will be in a strong position to continue the recovery started in 2009 so long as a second recession is avoided. Despite the 30 percent return so far in 2009, valuations remain below the 10-year average of a 16.0x price-earnings ratio. Furthermore global economic policy favours risk-taking.
“We remain long risk assets, including global equities, until we see a policy mistake or a double-dip in economic activity,” said Michael Hartnett, chief global equities strategist.
Gary Baker, head of European equity strategy, said, “Our positive global economic view for 2010 suggests that consensus top line sales estimates are too cautious. Attractive valuations and strong earnings revisions point to another good year for European equities, led initially by cyclicals.”
David Bianco, head of U.S. equity strategy expects S&P 500 sales growth to be led by the four ‘global cyclical’ sectors of Technology, Energy, Industrials and Materials. “We also expect Financials and Energy to appreciate the most in 2010 and expect strong appreciation with lesser risk from Industrials, Tech and Materials. Our S&P 500 12-month price target is 1275.” said Bianco.
Treasury yield curve to be steeper than market expects
Bin Gao, head of Asia Pacific rates strategy research, expects a moderate increase in global rates in 2010 given the ongoing economic recovery, the pressure of very heavy bond supply and fiscal sustainability concerns. These factors will keep many curves steeper than the forwards as central banks wait until the recovery is evident before embarking on rate hikes.
Credit –extra risk for extra returns
Jeff Rosenberg, chief global credit strategist, expects to see normalized returns as corporate credit outperforms both government bonds and cash. He also expects high yield returns to reach 10 percent, outperforming the high-grade sector, which he forecasts as providing returns in the 2 percent to 3 percent range. Rosenberg believes that the returns delivered by the credit markets over the past year are impressive, but unsustainable. Going forward, he feels investors will need to adjust their expectations for price appreciation to more normalized levels for the entire asset class.
U.S. dollar to make gains against G10 currencies
Bullish growth predictions support the view that markets will become more positive about the dollar in 2010. This will help the U.S. dollar continue its recent recovery against most G10 currencies in 2010. However, it is likely to weaken further against Emerging Market currencies, according to Steven Pearson, head of G10 currency strategy. While many investors took refuge in U.S. dollar assets as a safe haven in 2009, risk appetite is set to exert a lesser influence on appetite for the dollar in 2010.
Shift of focus within Emerging Markets
Daniel Tenengauzer, head of global emerging markets economics & fixed income strategy expects emerging markets to play a central role in global growth again, however, he believes the key theme of 2010 will be emerging Asia passing the baton to Mexico and emerging European countries. Tenengauzer also believes that thanks to the global recovery, export-led economies such as Korea, Mexico and Russia, should catch up with domestic demand-driven growth in China and India.
Commodities – Further demand for energy and industrial metals
An improving U.S. and global economic outlook will likely boost demand for commodities, especially in the second half of the year. Francisco Blanch, head of global commodities research believes that two years of extremely lax monetary policy will lead to higher consumption of energy and industrial metals, especially in emerging markets. Oil, copper, platinum, and to a lesser extent, gold prices should move higher in 2010.
Recovery unfolding region-by-region; U.K lags
While the global economic recovery is synchronised, exact timing depends on local conditions. Most economies started recovering in the third quarter of 2009. Countries that avoided a banking crisis, or which adopted a super-aggressive policy response, were the first to exit. The best example is China, which BofA Merrill Lynch Global Research predicts to grow by 10.1 percent in 2010.
Tighter fiscal policy and further rebalancing in the household and banking sectors are expected to weigh on the UK economy. The forecast for UK GDP growth is 1.5 percent in 2010. "The U.K. will share in the global upturn, but we expect it to lag many other major economies," said Nick Bate, U.K. economist. Most central banks are expected to scale back their monetary stimulus in the next two years. The pace will be determined largely by domestic conditions. Among the major central banks, the ECB will likely be ahead of the Bank of England, whereas the Fed will be last.
Bof A Merrill Lynch Global Research Macro Year Ahead for 2010/a>
