Glass half full for 2011, says Skandia Investment Group

• Global,  including UK, economic recovery to continue
• Interest rates to remain exceptionally low
• Equities  are cheap and are expected to rise 
• Further European contagion biggest risk

Skandia Investment Group (SIG) is positive on the outlook for 2011, believing that policy makers will do whatever it takes to ensure the global recovery continues.
Rupert Watson, head of asset allocation at SIG, says he expects the UK economy to have a slow start at the beginning of 2011, but to gather pace throughout the year, with growth improving to be above trend in 2012 and beyond.
Commenting, Watson says: “In the UK, we expect the economy to slow sharply at the start of 2011, before gradually picking up pace throughout the year and remaining favourable in 2012 and beyond.
“Economic surveys suggest that the recovery will continue and we support this view. In a small open economy such as the UK’s, theory suggests that the impact on growth from fiscal tightening is offset by boosts elsewhere. Specifically, interest rates, bond yields and the currency are all lower than they would otherwise be. This should boost consumption, exports and investment; while at some point – maybe 2011, maybe later – overall confidence should rise on the view the government has broken the back of the fiscal problems.
“Interest rates in the UK, eurozone, US and Japan are likely to stay on hold for most and probably all of 2011. The inability of interest rates to go any lower (although QE could be thought of as having the same effect as an interest rate cut) suggests that the fiscal tightening may not be fully offset and is the reason we expect growth to slow sharply early next year.”
Watson also notes that, despite predicting an equity rally in 2011, the risks and uncertainties remain greater than normal. In particular it is difficult to know how the European problems will be resolved.
“While our view for 2011 is currently very much half full rather than half empty,” he says, “we believe the lingering aftershocks of the financial crisis are likely to be with us for some time to come and  fully expect further developments to challenge our positive outlook. Having said that, equity prices currently discount these risks and remain cheap, especially versus bonds and cash. With corporate profits continuing to grow at healthy rates and interest rates remaining at exceptionally low levels we believe equities will rally in 2011 meaning a real risk for investors is that by waiting until all the problems are resolved the cost of equities could be much higher and they will have missed out.”