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Bringing you news, views and analysis since 2013

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Standard Life identifies key drivers for markets in 2010

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Standard Life Investments believes that corporate earnings, inflation and policy decisions will be the three key drivers for financial markets in 2010.

In the latest edition of Global Perspective, the global fund manager argues that excess capacity and limited credit availability will keep interest rates lower for longer, encouraging investors to look for sustainable yield opportunities.

In addition, commercial property valuations have become attractive, with the UK ahead of the curve, although bank exposure still needs careful monitoring.

Andrew Milligan (pictured), head of global strategy at Standard Life Investments, says: “After most OECD recessions, the first year or two of recovery normally see a very sharp recovery. On this occasion, 2010 is not expected to be a year of above trend global growth, constrained by such factors such as the lack of credit from a weak financial sector as well as tighter fiscal policy.

“Profits will grow in 2010; the key question is whether they can beat already optimistic market expectations. Analysts are forecasting earnings growth up some 20-25 per cent over the coming 12 months. The key issue for many companies and stock markets is their exposure to the faster overseas parts of the global economy rather than slower growing domestic earnings. For example, about two thirds of UK equity market profits come from overseas.”

Milligan says inflation will remain a problem for many central banks in 2010. The major concern will be the downward pressures on core inflation into 2010, towards one per cent a year, although temporary factors will push up headline inflation noticeably.

Weak underlying inflation reflects the sizeable amount of excess capacity, such as double digit unemployment rates. Milligan says 2010 looks set to be a year of the “jobless recovery”, similar to the early 1990s, good for corporate profitability but a noticeable headwind for consumer demand.

“Further ahead, inflation remains a risk for investors if central banks and governments do not successfully manage the withdrawal of excess liquidity from the financial system. Hence, the risks of policy error are considerable,” says Milligan.

“Our investment conclusions favour sustainable yield in various ways. Our house view weighting for UK property has increased throughout the year to heavy, reflecting the favourable valuation backdrop plus the improvement in the supply/demand balance. The decline in sterling has boosted overseas investor interest in UK prime property. Risks from bank exposure to the market still require monitoring.”

Although valuations of corporate bonds are not as attractive as they were in the spring, Standard Life still sees opportunities for further improvement into 2010 as default rates peak and roll over. Government bonds remain attractive while inflation is low, although the implications of the quantitative easing and rate decisions will eventually prove a major headwind, says Milligan.

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