Opalesque Industry Update - Global economic growth is forecast to be significantly lower in 2011 with a widening divergence in the performance of emerging versus developed economies, high volatility in markets, and rising uncertainty over macroeconomic issues, ING Investment Management (ING IM) said at its Annual Outlook Conference held in London on Wednesday.|
It warned that untested policy prescriptions from governments and central banks – which it has termed ‘test tube policies’ – could further contribute to significant market volatility. ING IM also said that much of the ‘developed’ world has made only 30% – 40% of the adjustments needed to adapt to the new environment and challenges, and estimates there is a 60% chance that global economies and markets will ‘muddle’ through 2011.
Valentijn van Nieuwenhuijzen, Head of Strategy, Strategy and Tactical Asset Allocation Group, said: “We are likely to face a tough and volatile economic and investment environment next year with the divergence between the emerging and developed economies widening further. Companies and investors will also need to brace themselves for unexpected consequences from the ‘test-tube’ macroeconomic strategies being employed by governments and central banks.”
ING IM expects real global GDP growth to be around 3.8% in 2011, compared with its forecast of 4.8% for 2010. The expansion in GDP is projected at 6.5% next year (2010: 8.1%) in the emerging economies and at 1.6% (2010: 2.2%) in the developed world, widening the economic performance gap between the two further.
These forecasts could be further modified by the possibility – put at 25% – that the world could lurch into another serious downturn, compared with a 15% chance of a surprise on the upside with strong economic growth. Developed economies may continue to be dominated by deleveraging and output gaps that would lead to deflation and low nominal growth.
Eric Siegloff, Global Head of Strategy and Tactical Asset Allocation Group, said: “Investors will need to take a much more dynamic approach to their investment strategies in the more turbulent and divergent financial market conditions we predict in 2011. This means a greater focus on growth, and in particular dividends, income and yield - or what we call ‘DIY’.
“With such a high degree of uncertainty, investors need better risk management and to take a more total return approach than one focused on benchmarks. In a low return world – which is what we are predicting – Beta alone will not deliver. You need to place a greater focus on asset managers who can consistently provide Alpha.”
ING IM believes that in such an uncertain environment with higher volatility, investors need to be more diversified and also more opportunistic in their investment behaviours and should frame their decision making process around three key areas:
Eric Siegloff said: “The need for a more dynamic, adaptive asset allocation framework in this uncertain environment is clear. It is important to recognise that structural or temporary shifts in macro and market fundamentals are not always captured by ‘rule based’ signals; manager skill and experience play a key role here. Furthermore, it is important to ensure risk control at all levels of the investment process. Simply, it is better to overestimate risk rather than underestimate risk.”
Outlook for Major Investment Asset Classes in 2011
During its Annual Outlook Conference, ING IM provided the following forecasts for the major investment asset classes in 2011:
Sustainable income and growth: Here, dividends will become an even more important income generator, whilst low payout ratios, strong balance sheets and high profitability will support further growth.
Corporate spending: Corporate confidence is rising, and strong cash flows and balance sheets will lead to increased activity in buybacks, dividends, M&A activity and Capex.
Emerging markets: There are still many attractions here for investors, including low public and private debt levels and high economic growth. ING IM still believes that emerging market equity valuations are not in ‘bubble’ territory as some market commentators claim.
Patrick Moonen, Senior Equity Strategist, Strategy and Tactical Asset Allocation Group, said: “The 2011 outlook for equities is good and we expect returns to be in line with earnings growth. However, investors will need to focus on yield and also growth markets, whilst any increase in corporate spending will be the icing on the cake.”
Valentijn van Nieuwenhuijzen said: “Fixed income investors need to search harder for yield and this will mean a growing focus on emerging market debt, which is becoming increasingly more attractive. However, liquidity will be a key factor for investors next year, and so this asset class may also suffer in this area.”
Importantly, many trends and diverging patterns remain present in FX markets. Given this, ING IM believes that investors need to place more emphasis on FX as an asset class. It offers a large and relatively uncorrelated opportunity set to generate Alpha and associated returns.
However, ING IM warns that there are a number of risks facing the commodity markets next year including global industrial production and world trade levelling off, errors or tightening in China’s economic policies and the possibility of currency wars escalating into trade wars.
Profile: ING Investment Management
ING IM applies its proprietary research and analysis, global resources and risk management to offer a wide variety of strategies, investment vehicles and advisory services in all major asset classes and investment styles. Visit www.ingim.com for more information.