Equities set to grab the headlines in 2011

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#1
Another bullish report on equities!

Business Times - 13 Jan 2011

Equities set to grab the headlines in 2011


Bonds expected to take a backseat this year; Asian and commodity stocks may fly

By LYNN KAN AND LINETTE LIM

(SINGAPORE) If 2010 was the year of corporate and emerging market bonds, then 2011 is gearing up to be the year of equities.

'The upside has become more limited for corporate and emerging market bonds, as coupons will not rise in the event of higher inflation rates, and bonds are now trading closer to fair value,' said UBS researchers. 'The opposite is true for equities that still haven't unlocked their full valuation potential.'

JPMorgan is also favouring equities over bonds, against a backdrop of accelerating global growth and peripheral Europe's sovereign debt crisis.

'The dominance of growth stimulus over inflation control across much of the world makes us overweight real assets, such as equities, real estate and commodities, over nominal assets, which are cash and bonds,' the bank said.

'After a decade of disappointing equity returns and a slow death for the equity culture, equities may again become a preferred asset for no other reason than the alternative - bonds - looks dangerous in comparison.'

If equities are generally back in favour, then commodities, cyclicals and technology are the sectors to be in, as well as Asian and emerging stocks which are set to outpace the developed markets.

Most investment banks agree that the commodity price jumps in 2010 will stretch into 2011. 'We favour commodities where supply growth is limited, such as gold, copper and corn, and where prices haven't seen exponential increases, such as cotton and silver,' said UBS.

Credit Suisse added that because prices have gotten expensive - gold has winged its way above US$1,300 per ounce, for instance - investors should adopt 'momentum investing' tactics to exploit 'significant price swings'. 'Although passive buy-and- hold investment strategies should still have some upside in 2011, we think a momentum investment strategy is more promising . . . (these are) investment strategies that shift positions and sectors more often and focus on markets where strong price movements emerge.'

Also bullish on commodities is JPMorgan, citing 'strong demand from the emerging markets, in particular China, coupled with tight supply conditions'.

As more and more smartphones and tablets get snapped up by consumers, technology stocks in Asia look promising. 'Demand in 2011 should hold up well because of the overwhelming new product pipeline,' said HSBC. 'Since we do not expect a single brand or product to dominate in the current competitive environment, component makers such as Largan will better benefit from these new product launches,' said the bank, which is 'overweight' on the Taiwanese technology sector.

JPMorgan is favouring the US technology sector. 'With Republicans taking control of the House, policies are set to become more business-friendly for US companies. Our US equity analysts believe that healthcare and technology are the sectors poised to see the most benefits.'

The consensus is that Asian and emerging market equities should fare better than advanced economies in the US and Europe. The banks said valuations in Asia are still not overstretched. Said Citi: 'If every investor and his/her dog were fully invested in Asia ex-Japan, multiples would surely be higher than they currently are, as would trading volumes.'

Credit Suisse and Citi are looking at an upside of 19 per cent and 25 per cent, respectively, from Asian stocks, while HSBC is expecting what it called a more 'modest' 11 per cent return, given concerns that earnings growth could be thwarted by weak margin expansion due to rising inflation.

The Chinese market drew mixed calls - UBS and Credit Suisse prefer China, while HSBC and Citi are 'neutral'. JPMorgan is keeping its 'underweight' rating on China. 'The shift in the Chinese growth model away from investment into consumption benefits only a small part of its MSCI benchmark,' it noted. 'In addition, 79 per cent of MSCI China consists of companies where the government is the controlling shareholder, which makes them vulnerable to policy risk.'

Taiwan and Russia are two other markets which drew votes from analysts. HSBC and UBS said that the Taiwanese market is trading at a discount, while both JPMorgan and UBS are overweight on Russian equities.

The recent US stockmarket rally - the S&P 500 has risen about 5.7 per cent since the start of December - has revived hopes of an 'American regeneration'. Credit Suisse favours innovative American corporates like Apple, those with strong branding and re-engineered business models like GM, and companies which have powered their way into new markets like Coca-Cola.

UBS noted that investors should not abandon Europe entirely, but to focus on 'economically strong core Eurozone countries' like Germany and Switzerland.

While the focus will be very much on equities, bonds are not totally written off. Said UBS: 'Within the investment-grade segment, we caution investors to limit exposure to bonds with long maturities (over 10 years), and recommend finding opportunities in the 'BBB' space, ideally those with five to seven years of maturity. We continue to like bonds of Hong Kong and Singapore conglomerates, and lower Tier-2 debt of Hong Kong banks.'

Investors should also add credit risk to their fixed income portfolios with higher-yielding corporate bonds and emerging market government bonds, said Credit Suisse, UBS and JPMorgan.

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#2
Not just the locals. Ang Mohs (US, in this case) bullish too.

This was taken from today's Today. (link)
A look ahead

10 ways a firm US recovery will manifest in 2011
by Bob Doll
05:55 AM Jan 13, 2011


As a way of discussing our economic and market views for the year, we present our 10 predictions for this year:

1. Growth in the United States accelerates as real GDP reaches a new all-time high.

2. The US economy creates 2 million to 3 million jobs this year as the unemployment rate falls to 9 per cent.

3. US stocks experience a third year of double-digit percentage returns for the first time in more than a decade as earnings reach a new all-time high.

4. Stocks outperform bonds and cash.

5. The US stock market outperforms the MSCI World Index.

6. The US, Germany and Brazil outperform Japan, Spain and China.

7. Commodities and emerging market currencies outperform the US dollar, the euro and the Japanese yen.

8. Strong balance sheets and free cash flow lead to significant increases in dividends, share buybacks, mergers and acquisitions and business reinvestment.

9. Investor capital flows move from bond funds to equity funds.

10. The US presidential campaign next year sees a plethora of Republican candidates, while Mr Barack Obama continues to move to the political centre.



For some context around these predictions, we expect to see continued improvement in US economic growth, especially the quality of that growth.

This trend, coupled with improved business and consumer confidence as well as a less hostile capital markets attitude from Washington, should lead to another reasonably good year for risk assets including equities in particular.

Our 1,350-plus S&P 500 Index target implies that the stock market should appreciate at least in line with earnings with the risks skewed more to the upside than was the case last year.

The cyclical recovery should continue but at a less-than-normal pace due to the structural problems that continue to face most of the developed world.

In this environment, the US Federal Reserve will likely remain accommodative, which will probably result in some further steepening of the yield curve. Equities are likely to surpass fixed income as the preferred asset class, both in terms of price appreciation and investor flows.

We expect the US stock market to outperform the MSCI World Index again this year. The gap between the higher growth rates in the developing world and the lower ones of the developed world will likely shrink somewhat this year, causing less differentiation in equity returns.

On the possible what-can-go-right front, we include an acceleration in jobs gains, improving business and consumer confidence, a possible upside surprise in real GDP, corporate earnings exceeding expectations (as seen last year) and Washington, beginning to address the debt and Budget problems.

The what-can-go-wrong list includes the possibility of credit problems resurfacing (including US housing, sovereign nations and state and local governments), commodity price increases causing profit margin pressure, inflation fears, a higher-than-expected rise in interest rates and excessive emerging markets tightening to curb asset bubbles.

The upside possibilities could lead to a stock market that appreciates 10- to 20-per-cent more than we expect, while the downside issues could result in low double-digit percentage losses. In summary, while our expected gains for equity markets are similar going into 2011 to what they were going into 2010, we believe that the risks have moved from the downside to the upside.



The writer is vice-chairman and chief equity strategist for fundamental equities at BlackRock, a premier provider of global investment management, risk management and advisory services. He also is lead portfolio manager of BlackRock's Large Cap Series Funds. Prior to joining the firm, he was president and chief investment officer of Merrill Lynch Investment Managers.


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