Equity Upside: Investing In The Global Recovery
It is the calm after the storm and the dust is only now beginning to settle. As we enter the early stages of the recovery investors are continuing to ask how best to participate in the global economic recovery through equity exposure.
Overall, the outlook is for strong global growth going into 2010. With the expected continuation of accommodative monetary policy for another year, 2010 should see continued growth in corporate earnings as consumers and the private sector in OECD economies being to experience a re-balancing of consumption and demand. We see the strongest growth in Asia and other emerging economies.
From our perspective, as there is a strong potential for growth to be stronger then market consensus, markets will continue to rally, albeit the upside velocity will be more muted then from the huge upside witnessed since the March 2009 lows until today.
Other key factors to note:
-Low rate/Strong growth has in the past resulted expansion of earning multiples
-Credit is at fair value; the current deleveraging is driving a steady spread-narrowing trend
Key growth data based on forecasts from Barclays Capital:
-U.S GDP expected to grow 3.5% in Q3, 4% in Q4 and 5% in Q1 2010
-Average U.S GPD growth in 2010 expected to be 3.6%
-Global GDP expected to peak at 4.9% by the end of Q4 2009 and average 3.9% on an annualized basis
-Overall growth to be slower then in pervious recoveries due the severity of the recession
One thing investors must be aware of is that the current accommodative monetary policy has lead to a new credit cycle. Excess liquidity and low interest rates are fueling corporate restructuring, M&A activity, debt reduction and balance sheet repair.
There has been massive deleveraging across the board and both consumer and corporate balance sheets have improved, this has been reflected in credit spreads, however many believe that equities are lagging the credit markets and do not reflect the surge in corporate bonds.
In the equity space we suggest establishing exposure to:
-Small Caps
-Value Stocks
-High Beta Stocks
-Early Cycle Sectors
In fixed income we suggest establishing exposure to:
-High Yield Corporate Bonds
In commodities we suggest establishing exposure to:
-Precious Metals
-Industrial Metals
