BofA Merrill Lynch Looks Ahead to 2011

The Global Research team at BofA Merrill Lynch forecasts that 2011 will be a year of modest global GDP growth and excess liquidity that will translate into higher global equity prices, led by the U.S. and emerging markets, modest returns from fixed-income assets, a stronger U.S. dollar, and another positive year for commodity prices.  The team also believes that the cyclical bull market in risk assets that began in March 2009 is not over, and is forecasting global economic growth of approximately 4%, and U.S. growth of 2.8%.

Jeffrey Rosenberg, head of Global Credit Strategy and U.S. Fixed Income Strategy coordinator, believes that relative to the past two years of double-digit fixed income returns, next year marks a significant decline in return expectations, down to single-digit returns. The strongest fixed-income returns will be in municipals, according to John Hallacy, Head of Municipal Research.   

Large-cap equities are forecast to outperform small-cap equities (with the exception of technology) next year. According to Steven DeSanctis, head U.S. Small Cap Strategy, high valuations, lofty earnings expectations, and low equity manager cash levels are headwinds for small cap stocks. Meanwhile, growth is expected to outperform value, reflecting high-dividend yields, greater global exposure, and cheaper valuations.

“After the epic market drama of 2008 and 2009, arguably the biggest surprise of 2010 was the normality of asset price returns,” said Michael Hartnett, chief Global Equity strategist and chairman of the BofA Merrill Lynch Research Investment Committee (RIC). “Going into 2011, the probability of market tail risks is likely to remain elevated, with the specter of premature fiscal tightening, a double-dip in U.S. housing values, exploding borrowing costs in Europe and potential oil price spikes all looming over our forecasts.”

In addition to economic trends as a whole, in its forecast, BofA touched on investment themes as well.  The research team expects the Fed to be on hold until March 2013, but investors should begin to plan in 2011 for an eventual rise in interest rates.Investors who are willing to move down in credit quality should consider senior loan funds, where yields are relatively high and coupons are likely to rise with short-term rates.

Also, BofA found that in 2010, massive outflows into fixed income and passive strategies punished active managers. However, fundamental strategies may return in 2011. Active manager performance has already begun to improve, and fundamental stock selection strategies have historically outperformed after periods of high correlation.   

A complete analysis of BofA Merrill Lynch expectation’s for the GDP in 2011 is available here.