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Corporate sector can generate strong profits in 2011

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Standard Life Investments predicts that the corporate sector can generate strong profits in 2011, supporting sustainable yield opportunities in various asset classes and markets.

In the latest edition of Global Perspective, the fund manager argues that although investors will continue to focus on a number of major risks into 2011, such as the future of the Euro, inflationary pressures in emerging markets or further quantitative easing, the high and sustained cash flow which companies can still generate in this environment should underpin an improvement in investor confidence.

Andrew Milligan, head of global strategy, Standard Life Investments, says: “Our house view continues to favour ‘sustainable yield’ as the investment theme for asset allocation. Although growth momentum in the global economy is weak by historical standards, hence we expect interest rates lower for even longer, strong corporate cash flow means investors can still find many income and yield opportunities across a mix of credit, equity and property markets.”

However, Milligan says there are a number of highly complex issues facing policy makers which could result in even more turbulence in financial markets in 2011 than that seen in 2010.

The main tensions come from the high levels of debt, public and private, and the lengthy process of de-leveraging being seen.

A considerable adjustment has already taken place in the household sector, as higher savings ratios demonstrate. A major risk would be a further employment or income shock, say from a spike in oil prices.

“Governments look to be the critical source of tension in 2011. A stark debate is taking place between the need for fiscal austerity to demonstrate credibility to markets and the need for stimulatory policy, fiscal and especially monetary, to boost growth. All in all, the ability of the world economy to cope with these pressures is very dependent on continued corporate cash flows underpinning strengthening demand from the business sector into the real economy,” says Milligan.

“Although investor confidence will wax and wane periodically, over the year it should improve as more investors recognise that the economic recovery does have momentum and the corporate sector remains in good shape.”

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