ING Investment Management Europe (ING IM) announced at their Annual Outlook Conference, London, that it expects to see greater divergence in macro, market and sector themes. It predicts emerging markets will continue to outperform developed markets based on superior growth dynamics and ample liquidity. It further predicts a preference for risky assets over risk-free assets, albeit with a defensive bias within the risky asset allocation.
Our core investment theme is that investors will seek high, sustainable growth complemented by yield support in what we expect will be a low-growth, low return world, says Eric Siegloff, Head of Strategy and Tactical Asset Allocation at ING IM. He added that: The importance of yield in a low-return environment leads to a preference for large capitalisation, quality, high dividend strategies in equity markets and higher-rated spread products in fixed income markets.
The asset manager believes the biggest risks facing the markets next year will be associated with the withdrawal of quantitative easing, the move to higher policy interest rates, oil price volatility, impetus for financial sector regulation and how governments manage fiscal policies.
ING IM says these overarching themes and risks may have a significant impact on equity and fixed income markets, resulting in higher volatility from current levels.
ING IM is bullish on emerging market equities, believing they offer high sustainable growth. Patrick Moonen, senior equities strategist at ING IM, says: We no longer see emerging markets as a pure-play on global growth, but a region having its own unique set of opportunities.
ING IM forecasts high earnings growth in the emerging markets region and superior profitability in terms of return on equity (ROE) and operating margins. This is largely due to the strong macro balance sheet savings rates, debt to GDP, current account balance and secular growth story in the sector. Rising commodity prices are also helpful for emerging markets as a group but are likely to create greater divergence within emerging markets. Commodity exporters will benefit in 2010, while those countries importing are likely to come up against rising costs.
Monetary policy across the emerging markets regions will also diverge as some parts will suffer from inflation more than others.
In terms of earnings growth in 2010, ING IM is forecasting strong growth driven by cost cutting and improved revenue growth, which it expects will take place predominantly in the first half of 2010.
ING IM predicts that equity investors will predominantly be looking for yield enhancement in 2010 and that dividends will represent a bigger part of the total equity return. As a result of an earnings rebound and close to average pay out ratios, it expects double digit dividend growth next year dividend yield will approach corporate bond yield.
Next year, is also likely to see a change in sector leadership. ING IM believes that the valuation of cyclical sectors is at the high end of the range, and that the recovery trade will broaden towards more defensive sectors. Health care and telecoms offer the most attractive valuations and investors should be cautious on the consumer discretionary sector. Commodity related sectors will benefit from rising prices.
In the fixed income market, ING IM favours the higher rated and fundamentally stronger parts of the credit markets and warns investors to be on guard for a short-term shift in liquidity conditions towards the end of the first quarter of 2010.
D.C.