Live: the outlook for markets in 2010

Financial Times 19/01/10 – A turbulent 2009 managed to bring returns for equity and bond investors, while those with dollar holdings had cause for concern. Emerging markets triumphed over the entire decade, while developing asset classes like commodities also showed that youth was preferred over maturity. But what does the next year hold in store for investors? More of the same, or will there be corrections to established themes? What are the stumbling blocks likely to be, and what will ease the pain if we are in for a bumpy ride?

In the first weeks of 2010, Ask The Expert has access to some of the biggest trading houses in the City. Holger Schmieding managing director and head of European economics at Bank of America Merrill Lynch answers readers’ questions on the outlook for 2010. His responses appear below:

In your view, what would be the base scenarios? And what might be the biggest surprises in 2010?
Charlie Chen London

Holger Schmieding: Our base case is simple: the global economy continues to recover from the post-Lehman crisis. We look for 4.4 per cent global GDP growth in 2010 and a similar pace in 2011. Global monetary policy is so expansionary that it supports further financial healing and a rebound in the real economy. The worst downside risk would be a return to major financial turbulences akin to those of February/March 2009. That would put the economic recovery on hold for a while. But there is an equal chance that the huge monetary stimulus lifts asset markets and economies even more strongly than we expect.

In Europe, debt-ridden Britain lagged behind the unfolding economic recovery last autumn. But as ultra-low interest rates revive the housing market and a still-cheap sterling brightens the export outlook, Britain could be among the economies springing a positive surprise later this year.

How do you assess the risk of an emerging oversupply in the Chinese economy? Are the high investment levels lifting the productivity of the economy or largely wasting resources?
Marco, Sao Paulo

HS: We see no need to worry much. China has managed its economy reasonably well throughout the post-Lehman troubles. It was the first to turn the corner. A massive credit expansion always carries a risk that some funds may be wasted. But if really need be, China with its record foreign exchange reserves could afford some future write-offs.

More importantly, a major part of the infrastructure investments, better access for the hinterland to the more advanced coastal regions, will very likely lift the productive capacity of the economy and yield major long-term benefits.

Would you expect the emerging markets to continue to outperform European markets in the next 3 to 5 years?
J Segrove, unknown

HS: Catching up to the advanced economies, emerging markets can grow fast for years to come as long as they get their own policies roughly right. Their markets can do very well on trend. But that does not hold for each year. As global manufacturing revives and the euro becomes less overvalued, most parts of Europe may perform very nicely soon. Much of emerging Europe, which had been a focus of concern in early 2009, could shine in 2010.

What are government bond yields now telling us about the outlook for interest rates this year – in Europe, the UK and the US?
Steven Sparks, Singapore

HS: Bond markets are pricing in that key central banks will start to raise rates modestly in late 2010. By and large, we agree with that assessment. As financial healing progresses and economies recover, the central banks need to scale back their huge stimulus. The European Central Bank may move a bit more forcefully than markets expect. The eurozone has few problems with consumer leverage or real estate markets (Ireland and Spain are only 13 per cent of the region). The US Fed will probably wait until early 2011 and thus longer than the market projects. We look for the Bank of England to deliver a first 50bp hike this November, following some rebound in consumer spending in the wake of an upturn in the housing and labour market.

Do you foresee a contraction in credit in the developed world and a consequent reduction in consumer spending and asset values such as property coupled with an increase in exports?
P Spencer, Shenfield, Essex

HS: We do not expect a significant contraction in credit to consumers. The correction in housing markets is likely over. Interest rates will rise, but only when economies and the majority of consumers can bear the return to more normal mortgage rates. Global trade has fallen in the post-Lehman crisis. Exports and imports will both rebound. Thanks to the low exchange rate and somewhat less spendthrift consumers, British exports will rise faster than imports.

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