Flight to safety of recent years looks likely to be replaced with renewed appetite for risk in 2011
If 2010 saw the boom of the bond market, investors are now betting that shares will be the stars of next year. As the world economy comes out of recession, a greater appetite for risk has made some investors dump their bonds to move into the stock market ? helping to fuel the rally that has seen the FTSE 100 rise 400 points in recent weeks.
"There has been a flight to safety over the past two years, mostly to government and high-quality bond funds, that lasted until recently," said Ashok Shah, chief investment officer at London & Capital. "We have been out of recession for more than one year, but people were frightened to believe it, as they thought we could fall into a double dip. But it's unlikely that Germany, Britain or Japan will go into a recession again."
Higher corporate profits, more mergers and acquisitions and strong growth from emerging markets are expected to fuel equity markets in 2011, despite the ongoing turbulence in Europe's sovereign debt markets, investors say.
Companies around the world are expected to become more acquisitive next year, which usually lifts share prices. "European companies have never had so much money on their balance sheets ? they have cash coming out of their ears," said Gary Baker, head of EU equity strategy at Bank of America Merrill Lynch.
Stock markets may be particularly attractive in emerging markets, especially in the so-called Bric countries ? Brazil, Russia, India and China ? which have double-digit economic growth and healthier banking systems. China's economy will be almost twice as big as that of the US by 2050, becoming the new world leader, Goldman Sachs research shows. India will be the world's third-largest economy, while Brazil will be the fifth.
Commodities are also expected to be popular in the new year, as emerging markets' growth is pushing demand for metals such as copper. "Emerging markets will have strong growth, and increased government spending in infrastructure, such as in China," said Sabine Schels, strategist at Bank of America Merrill Lynch.
Schels's team thinks the construction of roads, bridges and cities will push up the price of basic building materials such as iron ore, nickel and aluminium. They are betting that copper could reach $11,250 per tonne, up from about $9,400 at present. Gold may also continue its rise, probably hitting $1,500 per ounce, she said.
There is one thing on which investors agree: 2011 will bring volatility, given high government deficits, the sovereign debt crisis in Europe, and stricken banks. "The recent renewed euro problems are proof to us that the system remains very fragile," said Deutsche Bank in its 2011 credit outlook.
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