Despite a spate of disappointing economic outlooks from government and private sources, Prudential International Investments Advisers Chief Investment strategist JohnPraveen expects the equity rally to continue into 2010 year-end as a new round of monetary stimulus should support the flagging recovery, while providing additional liquidity for financial markets.
Writing in his “Global Investment Strategy – October 2010,” Praveen believes the earnings outlook remains solid while valuations “remain attractive giving scope for multiple[s ]expansion.”
Among other highlights:
Global macro uncertainties continue to ease with a fresh round of monetary stimulus. These reflation measures should ease fears of double-dip and deflation. While growth momentum remains weak in the developed economies, Q3 GDP is expected to rebound in the U.S. and Japan after the weak Q2. Euro zone and U.K. is expected to slow in Q3 after the Q2 rebound. GDP growth remains solid in the emerging economies.
The earnings outlook for the second half of 2010 in the major markets remains solid although slower than the strong pace in the first half. Equity valuations remain attractive, which combined with low interest rates are likely to lead to multiple expansion in coming months. In addition, the U.S. mid-term election cycle is positive for stocks as historically the U.S. equity market posted solid gains following mid-term elections.
Bond yields are likely to remain supported by the second round of asset purchases by the Fed (expected in November). In addition, GDP growth in the developed economies remains below trend in the second half of 2010 and inflation remains uncomfortably low. However, a double-dip is increasingly unlikely in 2010 with growth expected to improve in Q3 and Q4. Further, deflation is not a risk in the near-term and prices are unlikely to remain depressed if central banks keep the spigot of monetary stimulus open well into 2011. Finally, stocks still remain attractive relative to bonds with P/E ratios depressed and bond yields low.
Among global stock markets, Prudential remains overweight in Emerging Markets and Euro zone. They remain underweight in the U.K. on weaker Q3 GDP growth after the Q2 rebound. They remain underweight in the U.S. with easing risk aversion.
Among global sectors, Prudential remains overweight in Industrials and Information Technology. They have upgraded Consumer Discretionary and Materials to overweight. They retain a modest overweight on Energy. They remain neutral on Consumer Staples and have downgraded Financials to neutral. They remain underweight in Healthcare, Telecomm and Utilities.
Among global government bond markets, Prudential remains overweight in Emerging Markets and U.S. Treasuries. They have upgraded Japanese JGBs to neutral and downgraded Euro zone to underweight.