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Bill O'Neill, CIO, Merrill Lynch Wealth Management

Income growth the priority in 2011 as global recovery takes root


Investors should seek secure income growth in 2011 as global recovery settles into a “new normal” pattern led by emerging economies, according to Bill O’Neill, chief investment officer for Europe, Middle East and Africa at Merrill Lynch Wealth Management. 

Global economic growth is likely to slow to four per cent in 2011, from 4.8 per cent in 2010.

Recovery in the US and continental Europe is likely to disappoint but strong domestic consumption should ensure a soft landing for China, believes O’Neill.

“As the world economy recuperates investors should favour commodities and equities over government and corporate debt. Within equities the focus should be more on dividends than capital growth,” O’Neill says. “Investors should also treat emerging market debt with caution, taking care to avoid overvalued assets.”

The 2007-2009 recession proved far deeper than previous downturns and recovery slower, according to Merrill Lynch Wealth Management Year Ahead 2011 views.

The emerging world has become the source of global savings, with savings rates in 2009-14 forecast to reach 33 per cent of disposable income, while rates in advanced economies continue their decline. These savings are “turbo-charging” emerging market growth to satisfy rising consumer demand, while US consumers strive to cut their debts and European governments tackle their massive deficits.

While Merrill Lynch Wealth Management forecasts the US to avoid a double-dip, recovery in US job creation remains very weak compared to previous recoveries. Public spending in developed markets is dominated by health and pension provision for ageing populations.

Monetary policy in developed economies is still exceptionally loose. Yet, as developed markets created dollars, emerging markets accumulated dollars. This should lead eventually to downward pressure on the dollar and certainly the euro. A weaker euro is expected to continue in 2011 but the dollar will get some respite, according to O’Neill. It has also resulted in upward pressure on the renminbi and some other emerging markets currencies, combined with trade tensions. Over and under-valued currencies are distorting asset valuations and the problem is expected to grow worse in 2011.

“The ideal situation would be if US and developed world monetary policy adjustment occurred at the same time as emerging countries allowed greater currency flexibility and appreciation,” says O’Neill. “However, there is a risk of ongoing tensions and of policies such as controls over capital flows to emerging markets.”

Though German recovery, driven by emerging market demand, beat expectations in 2010, many Eurozone countries, particularly Spain, France and Italy, continue to overestimate their growth prospects, O’Neill believes. Weakness of peripheral economies blights the region and the Euro.

US growth is expected to slow to 2.1 per cent in 2011, from 2.7 per cent this year, but there could be a second-half upswing that should start to reduce unemployment as the global recovery becomes self-sustaining. In the UK, annual growth is expected to strengthen to two per cent and the recovery seems relatively established and able to override government spending cuts.

Meanwhile the Chinese economy is expected to grow by nine per cent and India by 8.2 per cent. However, strong emerging market equity performance in 2010 was focused on smaller markets such as Thailand, Turkey and Indonesia, and this trend is expected to continue in 2011.

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