BofA Merrill Lynch Global Research released its Global Macro Year Ahead economic and market forecasts, projecting higher-than-consensus GDP growth, low inflation, a bullish outlook for equities, a strengthening U.S. dollar against select currencies and a less attractive outlook for government and corporate bonds.
"We believe the global economy will gather momentum in 2010," said Ethan Harris, head of North America economics and coordinator of global economics. "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."
2010 Forecast Highlights
-- The BofA Merrill Lynch Global Economics Research team forecasts global
GDP growth to be 4.4 percent in 2010, well above the 3.1 percent
predicted by the International Monetary Fund. The team projects growth
will be led by China at 10.1 percent, while projecting U.S. GDP growth
to be 3.2 percent.
-- Harris expects a further fall in core inflation and projects that the
U.S. Consumer Price Index will be 2.5 percent. He feels that the
transmission process whereby monetary easing leads to rising prices is
currently "stuck in neutral" as banks are rebuilding there balance
sheets. He also believes that central banks will have plenty of time
to sop up liquidity before inflation becomes a real issue.
-- Michael Hartnett, chief global equity strategist and chairman of the
BofA Merrill Lynch Research Investment Committee, is targeting the
MSCI All-Country World Index at 350, roughly a 20 percent upside and
is bullish on European equities, Asia and emerging markets.
-- David Bianco, head of U.S. equity strategy, expects the S&P 500 to
appreciate about 15 percent by 2010 year end to 1275. Bianco expects
this appreciation to be driven by S&P 500 sales growth in four "global
cyclical" sectors of Technology, Energy, Industrials and Materials.
"These four sectors have high direct foreign sales and benefit from
high commodity prices and U.S. exports," said Bianco. "We also expect
Financials to outperform as a result of steepening yield curves and
underestimated normalized earnings power."
-- Francisco Blanch, head of commodities strategy, expects that
commodities will be driven by strong demand in emerging markets.
"Crude oil could break $100 per barrel by late 2010 and we're
forecasting gold to top $1,500 per ounce in the next 18 months,
particularly if the dollar weakens further against certain undervalued
emerging market currencies," said Blanch.
-- The BofA Merrill Lynch Research U.S. Interest Rate Committee expects
returns on long-term Treasuries and municipals to be modestly negative
and forecasts 10-year Treasury yield to be 4.25 percent, while the
30-year Treasury yield is predicted to be 4.95 percent.
-- Jeff Rosenberg, chief global credit strategist, expects to see
normalized returns as corporate credit outperforms both government
bonds and cash. "We expect high-yield returns to reach 10 percent,
outperforming the high-grade sector, which we forecast as providing
returns in the 2 percent to 3 percent range," said Rosenberg. "The
returns delivered by the credit markets over the past year are
impressive, but unsustainable. Going forward, investors will need to
adjust their expectations for price appreciation to more normalized
levels for the entire asset class."
-- Steven Pearson, head of G10 currency strategy, forecasts the U.S.
dollar to strengthen against G10 currencies next year, primarily
against the euro. However, over the first half of 2010, he expects the
Japanese yen to rise further against both the USD and EUR.
"Despite reassuring market strength, 2009 ultimately played out as a year of contradictions," said Hartnett. "While credit markets, commodities and stocks surged, many investors stayed on the sidelines, awaiting surer signs of recovery. The coming months will reveal whether investors can move forward with confidence or whether a policy misstep will interrupt the slow and steady recovery we think is possible."