Greatest Opportunities Remain Europe and Japan, Says F&C

F&C Asset Management, is predicting that European and Japanese equities will lead the performance pack in 2006, despite an already strong set of returns during 2005. Whilst F&C remains broadly positive on equities, the investment house also warns that the

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F&C Asset Management, is predicting that European and Japanese equities will lead the performance pack in 2006, despite an already strong set of returns during 2005.

Whilst F&C remains broadly positive on equities, the investment house also warns that the risks are rising and believes better value is emerging once again in government bonds.

“We began 2005 heavily overweight equities and have not been disappointed. Equities have risen sharply across all major markets, with even the laggard FTSE All Share returning over 15% year-to-date,” said Paul Niven, head of Asset Allocation at F&C.

“The equity recovery has been bolstered by strong corporate earnings, resilient global growth and relatively attractive valuations. Notably, despite the strong returns from share prices, these have not kept pace with earnings growth, so although markets have ended the year higher – equity valuations have actually not become any dearer,” added Niven.

Although F&C believes that the global macro backdrop for 2006 remains favourable, with economic growth slowing modestly, Niven sounds a note of caution with regards to the US economy, the principal driver of global growth. In contrast F&C believes that the nascent European and Japanese economic recoveries will continue, taking up the growth mantle from the US and lead to a more balanced global backdrop.

“Despite rising oil prices and the difficult news flow from Iraq, the US consumer kept on spending during 2005. As for 2006, we expect that the US economy is the one most likely to disappoint,” said Niven.

He points out that US interest rate expectations have turned sharply bearish, pricing in at least two more hikes during 2006. As Fed Chairman Greenspan hands over to his successor, Bernanke, the market is considering a more explicit targeting of inflation.

“We actually think the interest rate and inflation consensus is somewhat too bearish,” said Niven, “and this is starting to make bond markets more attractive than they have been for some time as yields start rising from their low points.”

“As we enter 2006, we are acutely aware of the risks in markets. Earnings slowdown will become a dominant theme during the year but the biggest risk factor in our view is of an overreaction to inflation fears by central bankers. If rates head significantly higher then bonds will suffer and this could presage a more pronounced downturn in growth,” he concluded.

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