Yesterday morning Merrill Lynch laid out its vision for 2010 – cyclical equities like oil & gas companies and industrials, BRIC currencies and emerging market equities were at the heart of it – but warned that the global recovery could yet falter if the fiscal stimulus were not correctly exited.
By Josh Spero
Yesterday morning Merrill Lynch laid out its vision for 2010 – cyclical equities like oil & gas companies and industrials, BRIC currencies and emerging market equities were at the heart of it – but warned that the global recovery could yet falter if the fiscal stimulus were not correctly exited.
Bill O’Neill, portfolio strategist at ML WM EMEA, said: “The rescue mission has only been half completed. Levels of activity are still substantially below Summer 2007, and central banks face a challenge in identifying the right moment to exit the fiscal stimulus, when private demand has sufficiently recovered: too early and it will falter, too late and there will be inflation.”
Merrill’s predictions included a low risk of a double-dip recession, thanks to the revival in business; a preference for UK equities, gold and investment-grade commercial bonds; and an appreciation in the remnimbi against the US dollar. This last was important, said O’Neill, because it would result in a rebalancing of many other exchange rates, including a strengthening of the pound against the Euro and the dollar against the Euro.
O’Neill warned against oil, citing lower-than-expecting capital expenditure, and G7 debt, which is at risk once interest rates start to rise from their current historic lows and already have low yield. Merrill forecast that UK interest rates would start rising from 0.5% during the summer or possibly later in the year to end at 1.0%.
O’Neill, when asked about the likelihood of the Bank of England pulling off a perfectly-timed stimulus exit, said that private demand had already started to recover, but he added that the markets would be unhappy if they had not seen concrete medium-term plans for exiting the stimulus soon after the general election, regardless of which party won, and would not continue their current tolerance. It would lead to a rise in risk premia, he said.