Equity rally to continue as global growth picks up

• Strong global growth likely, despite fiscal tightening
• Risk of a European debt disaster falls
• Inflation worries increase due to strengthening recovery and commodity prices
• UK interest rate hike now looking likely before the summer

Skandia Investment Group (SIG) remains overweight equities and expects them to rally as the economic recovery continues, according to the latest Monthly Asset Allocation (MAA) report.

The MAA report, which is compiled by the Global Asset Allocation Committee (GAAC), also shows the group change is position on interest rates, expecting them to rise this year.

Commenting, SIG Chief Investment Officer James Millard said:

“Equities rose again in January, boosted by ongoing signs that the global economic recovery was gathering pace. The data suggests that 2011 is going to be a good year for global growth, despite fiscal tightening in many places. Successful bond auctions and improved economic data in Europe also raised hopes that the problems in some parts of Europe will remain contained.

“We remain overweight equities and expect them to increase significantly in 2011. The key drivers of this rally that we noted last month remain in place: strong economic recovery leading to strong corporate earnings growth, low interest rates (even if they go up a little) and favourable valuations.

“The strengthening recovery and the strength of commodity prices – especially food – have led to a rise in headline inflation rates. The rise is especially significant in the emerging world, where food makes up a substantial part of the inflation basket. Most emerging economies have responded with tighter monetary policy with further tightening likely given the still low level of interest rates.

“High unemployment, tightening fiscal policy and low core inflation means that low real interest rates are necessary in most parts of the developed world. There is some debate however, over quite how low they need to be given the ongoing economic recovery and the rise in commodity prices. Some policy makers in the UK and to some extent the eurozone are arguing that they need not be as low as they are now.

“Whilst we had previously expected the Bank of England and the ECB to keep interest rates on hold in 2011, an interest rate hike, especially in the UK, is now looking increasingly likely. Even if interest rates do start to go up this year, they are likely to remain low by historic standards for some time.”