Equities could see growth

Equities could deliver double-digit growth over the next year as global inflation moves up, signalling a turn in the interest rate cycle.

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Equities could deliver double-digit growth over the next year as global inflation moves up, signalling a turn in the interest rate cycle, according to a report out on Tuesday by Novare Investments.

The group said that global equities would continue to follow corporate earnings higher, presenting investors with an opportunity for further gains, despite having already almost doubled since their cyclical low two years ago.

Commenting on his economic report for the first quarter of 2011, Francois van der Merwe, head of macro research at Novare Investments, said that despite a range of first quarter shocks - including higher agricultural and oil prices and events in Japan - economic data remained fairly robust, pointing to improving global financial health.

“The recovery in global stock prices has been driven by a huge improvement in corporate earnings. While there is a risk that rising commodity prices could choke growth, we believe that economic expansion will accelerate modestly.

“Equities offer potential double-digit returns, but we expect the rand to depreciate from current levels in the long run. Changing monetary policy is likely to result in interest rate hikes by from late 2011 or early 2012,” he said.

Van der Merwe pointed out that many countries were expected to adopt tighter monetary policies as the global economy moved further along the business cycle.

Novare Investments said that quantitative easing in the US was expected to run until the end of June, with indications that a broad-based economic recovery was underway in that country. And while surging fuel and food prices were eroding real incomes, households had deleveraged and were better able to withstand the shock.

“Although US business seems reluctant to invest, unemployment is down. The inflation threat has materialised, but the US Federal Reserve is likely to keep interest rates lower for longer to allow the housing market to stabilise and employment conditions to improve.

“The US economy should remain buoyant for the next few months, but the housing market is the Achilles heel of the recovery, with sales depressed despite a drastic improvement in affordability,” said Van der Merwe.

The investment group said that, in the euro zone, core Europe was being driven by a buoyant Germany, while economies on the periphery continued to be plagued by the sovereign debt crisis. “Borrowing costs for Greece, Ireland and Portugal are at fresh highs and there is concern that Greece could default on its debt position,” Novare said.

The group added that core Europe, where inflation was also accelerating, should continue to grow.

“Surging food and energy prices are having a pronounced effect on emerging markets with some, like China, having already tightened monetary policy to cool down their over-heating economies.

“In SA we have low interest rates, low inflation, expansionary fiscal policy and a buoyant consumer sector. But consumer inflation faces upside risks, especially considering how the strong rand has so far shielded SA from inflationary forces,” Van der Merwe concluded. - I-Net Bridge

Source: http://www.iol.co.za/equities-could-see-growth-1.1063800

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