2010 Forecast Highlights
- The BofA Merrill Lynch Global Economics Research team forecasts global GDP growth to be 4.4 percent in 2010, well above the 3.1 percent predicted by the International Monetary Fund. The team projects growth will be led by China at 10.1 percent, while projecting U.S. GDP growth to be 3.2 percent.
- Harris expects a further fall in core inflation and projects that the U.S. Consumer Price Index will be 2.5 percent. He feels that the transmission process whereby monetary easing leads to rising prices is currently "stuck in neutral" as banks are rebuilding there balance sheets. He also believes that central banks will have plenty of time to sop up liquidity before inflation becomes a real issue.
- Michael Hartnett, chief global equity strategist and chairman of the BofA Merrill Lynch Research Investment Committee, is targeting the MSCI All-Country World Index at 350, roughly a 20 percent upside and is bullish on European equities, Asia and emerging markets.
- David Bianco, head of U.S. equity strategy, expects the S&P 500 to appreciate about 15 percent by 2010 year end to 1275. Bianco expects this appreciation to be driven by S&P 500 sales growth in four "global cyclical" sectors of Technology, Energy, Industrials and Materials. "These four sectors have high direct foreign sales and benefit from high commodity prices and U.S. exports," said Bianco. "We also expect Financials to outperform as a result of steepening yield curves and underestimated normalized earnings power."
- Francisco Blanch, head of commodities strategy, expects that commodities will be driven by strong demand in emerging markets. "Crude oil could break $100 per barrel by late 2010 and we're forecasting gold to top $1,500 per ounce in the next 18 months, particularly if the dollar weakens further against certain undervalued emerging market currencies," said Blanch.
- The BofA Merrill Lynch Research U.S. Interest Rate Committee expects returns on long-term Treasuries and municipals to be modestly negative and forecasts 10-year Treasury yield to be 4.25 percent, while the 30-year Treasury yield is predicted to be 4.95 percent.
- Jeff Rosenberg, chief global credit strategist, expects to see normalized returns as corporate credit outperforms both government bonds and cash. "We expect high-yield returns to reach 10 percent, outperforming the high-grade sector, which we forecast as providing returns in the 2 percent to 3 percent range," said Rosenberg. "The returns delivered by the credit markets over the past year are impressive, but unsustainable. Going forward, investors will need to adjust their expectations for price appreciation to more normalized levels for the entire asset class."
- Steven Pearson, head of G10 currency strategy, forecasts the U.S. dollar to strengthen against G10 currencies next year, primarily against the euro. However, over the first half of 2010, he expects the Japanese yen to rise further against both the USD and EUR.
"Despite reassuring market strength, 2009 ultimately played out as a year of contradictions," said Hartnett. "While credit markets, commodities and stocks surged, many investors stayed on the sidelines, awaiting surer signs of recovery. The coming months will reveal whether investors can move forward with confidence or whether a policy misstep will interrupt the slow and steady recovery we think is possible."
10 Investment Themes for 2010
In the recently published December RIC Report, the BofA Merrill Lynch Research Investment Committee, led by Hartnett, identified 10 key themes that the bank's clients should be positioned for in 2010.
-Government Balance Sheet Risk: The soaring U.S. budget deficit and a Chinese currency revaluation will drive 10-year U.S. Treasury yields above 4 percent by year-end 2010. Shorter-duration Treasuries and U.S. investment-grade corporate credit are less susceptible to such risks.
- Rising Taxation: The soaring U.S. budget deficit, looming U.S. healthcare reform and a likely second stimulus package will need to be funded through higher tax rates. Opportunities include essential purpose revenue and general obligation municipal bonds, and municipal bond exchange-traded funds.
- Alternative Dividend Yield Strategies: Dividend taxes are likely to rise in 2011, and as the prospect of higher taxes erodes the popularity of traditional dividend yield-oriented strategies, tax-advantaged or tax-deferred strategies will benefit.
- Financial Sector Rehabilitation: Steepening yield curves around the world, increased M&A activity and the still-underestimated normalized earnings power of financials should foster their returns surprise on the upside. Opportunities can be found in best-of-breed mega-cap global financials.
- Corporate Cash Flow Beneficiaries: High cash balances will translate into strategic M&A, a term describing non-speculative, non-private equity mergers. In addition, companies will increase capital spending and possibly dividends. We expect the beneficiaries of capital spending to include the industrial sector and temporary staffing companies as production expands.
- Rising Global Growth: The global policy stimulus seen in 2009 will continue to support global growth led by emerging markets, while in the U.S. an inventory restocking cycle and higher capex converge to push global growth well above 4 percent. Opportunities include best-of-breed mega-cap multinationals based in developed markets with a large presence in emerging markets.
- The Emerging Market Consumer: The emerging market consumer is at the beginning, not the end, of the credit cycle. Opportunities include emerging market currencies versus the U.S. dollar and, in equities, U.S. energy stocks, global energy majors and mega-cap multinationals.
- Commodity Price Inflation: Supply constraints are likely to resurface in the year ahead as commodity demand outpaces the productive capacity of current resources. Investment opportunities include long positions in gold and global energy stocks.
- Alternative Energy: Truly economical renewables may be years away, but investment in alternative energy is an important secular theme that will continue to gain ground. Alternative energy ETFs offer exposure to the burgeoning industry while providing important diversification across multiple technologies and business models. Old technology energy equities such as utilities will be a source of, not a beneficiary of, alternative energy investment.
- The Return of Active Management: Volatility has come down in 2009, especially since central banks began their critical quantitative easing in March. Lower volatility leads to lower correlation, resulting in greater differentiation in asset price performance. The trend favors active over passive management. Such a stock-picking environment should result in high-quality, best-of-breed stocks outperforming in 2010.
"Poor returns from the equities markets over the past decade, particularly from large cap equities, have created a pessimism bubble among investors," said Bianco. "We believe the S&P 500 is now undervalued, which could create many investment opportunities in the year ahead. Given our expectations for global growth led by emerging economies, a slow but steady U.S. recovery, and healthy S&P 500 EPS growth, we think that the pessimism bubble will finally burst in 2010."
