The AMP’s chief strategist, Dr Shane Oliver says that while 2010 has been somewhat disappointing for investors, 2011 is likely to see global growth continue, and this combined with attractive valuations and easy money is likely to underpin renewed acceleration in the recovery in shares and other growth oriented investments.
2010 consolidating the recovery
The key global themes of 2010 have been continued global economic recovery, benign inflation and easy global money, yet all against a backdrop of periodic macro threats resulting in a mixed and perhaps disappointing ride for investors.
Global growth in 2010 has actually turned out a little better than expected, coming in at around 4.7%, with emerging countries leading the charge.
Even advanced countries with growth of around 2.8% have come in a bit better than we expected.
Despite fears of a global dip back into recession the recovery has continued.
While inflation has been a bit of a concern in emerging countries, this has mainly been due to higher food prices.
In advanced countries underlying inflation has fallen, with the US coming close to joining Japan in deflation.
Global monetary conditions as a whole have remained very easy as advanced countries have kept interest rates near zero and the US and Japan have embarked on more quantitative easing.
While there has been some monetary tightening in emerging countries this has arguably just offset capital inflows which have resulted from resistance to upwards pressure on their currencies.
Contrary to the global experience, Australian economic growth has come in a little less than expected as housing construction has rolled over, rate hikes and greater caution with respect to debt have weighed on consumer spending, public sector stimulus has come to an end and mining exports and investment are yet to fully ramp up.
Nevertheless, the labour market has been very strong with unemployment falling to 5.2%.
However, despite a solid economic growth backdrop investment returns have generally been sup-par.
All was fine up until mid April, but the June quarter saw macro worries return in a big way – led by the European sovereign debt crisis, worries about a double dip in the US on renewed housing sector weakness and concerns that Chinese policy tightening would crash its economy.
This all weighed on returns for listed growth assets.
Returns for major asset classes are shown in the following table.
While returns are well down on 2009, the key winners over the last year have been global listed property, Asian and emerging shares and commodity prices.
Global bonds have also had solid returns as Government bond yields fell on growth worries and deflation concerns and credit rallied.
Returns from global shares were pretty subdued, but turned into losses once the rise in the $A is allowed for.
Australian shares were also a disappointment, with global macro worries made worse by Australia’s exposure to China (with Chinese A shares being one of the world’s worst performers in 2010), monetary tightening in Australia and the rise in the $A.
Australian unlisted commercial property provided good returns as investors took advantage of attractive yields ? By contrast, Australian housing was subdued as poor affordability in response to last year’s price surge and -higher mortgage rates flattened sales and house prices.
The subdued and mixed experience across asset classes saw subdued returns from super funds.
Outlook for 2011
While aftershocks from the Global Financial Crisis will continue to cause volatility, 2011 is likely to be a year of continuing global recovery.
The key themes of relevance for investors for 2011 are likely to be:
1. Continuing solid global growth. Business conditions indicators remain at levels consistent with solid growth ahead.
There remains plenty of pent up demand globally and while fiscal conditions are tightening monetary conditions remain very easy.
In the US, strength in the corporate sector is driving a pick up in employment and capital spending, housing indicators appear to have found a floor and retail sales growth is surprising on the upside.
In Europe, strength in Germany has offset weakness in debt impaired countries. 2011 is likely to see global growth of around 4.3%.
2. Emerging world to remain stronger, but gap to narrow.
Thanks to stronger domestic demand, growth in the emerging world is likely to remain stronger than in the advanced world, but reflecting relatively tighter monetary conditions the gap between the two is likely to narrow with emerging country growth of 6.5% versus 2.5% in advanced countries.
China is likely to grow by 9.5%, India by 8% and Brazil by 4.5%.
3. Essentially benign inflation. Excess capacity is likely to ensure inflation remains low in advanced countries.
Less spare capacity is likely to see inflation stay somewhat higher in emerging countries, but declining food prices – including in China – are likely to remove upwards pressure.
4. Fiscal tightening, but easy money. Fiscal tightening is already in train and likely to be the equivalent of one percentage point of GDP in 2011 in advanced countries and somewhat less in emerging countries.
However, the negative effect will be offset by continued, very easy monetary conditions with still high unemployment ensuring monetary tightening will
