This "pessimism bubble" idea seems a bit Orwellian, but part of its beauty is that it’s invisible from the inside. – Ilene
MERRILL LYNCH’S BULLISH 2010 OUTLOOK – A BUBBLE IN PESSIMISM
Courtesy of The Pragmatic Capitalist
We are just about finished wrapping up our series on 2010 outlooks. In this article we’ll outline Bank of America Merrill Lynch. Bank of America Merrill Lynch is very bullish heading into 2010 (an outlook similar to RBC). They see many of the trends of 2009 continuing into 2010 and driving equity markets around the world higher by double digits (see JP Morgan’s bullish emerging market outlook here). Ethan Harris, head of North American economics summarized the Merrill outlook:
“We believe the global economy will gather momentum in 2010. We think that the unprecedented mix of near-zero interest rates and high budget deficits will engineer an economic recovery that is real and sustainable. We aren’t forecasting a swift return to robust growth. In fact, the recovery will likely lag behind those of previous recessions – but we believe that the world economy will perform far better than the economic consensus would indicate.”
This macro outlook is underpinned by a number of variables:
- Global growth will be 4.4%, Chinese growth will be 10.1% and U.S. growth will be 3.2% – all above 2010 consensus estimates.
- Inflation will remain benign.
- U.S. stocks will rise 15% led by strong growth in global cyclical sectors – tech, energy, industrials and materials. Financials are also expected to perform well as the yield curve remains conducive to strong earnings.
- The MSCI All-Country World Index will rise 20 percent.
- Gold and oil will both continue to rally as strong demand from foreign investors remains the primary driver. Gold will breach $1,500 and oil will surpass $100.
- Government bonds will perform poorly.
- The Dollar & Yen will rally against the Euro.
Merrill also notes 10 key investment themes for 2010. From PR Newswire:
10 Investment Themes for 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.”
Interesting outlook indeed. A bursting in the pessimism bubble will likely mean a very real asset bubble – which should come as a surprise to Ben Bernanke and co.
