SIG remains overweight equities and expects three drivers to maintain equity rally in 2011

Skandia Investment Group’s latest Monthly Asset Allocation (MAA) report has highlighted the three main drivers that should boost equities in the coming month and further into 2011.
The MAA report, which is compiled by the Global Asset Allocation Committee (GAAC), shows the group start the year overweight equities amid a belief the rally will be driven by three main factors: growth, low interest rates and favourable valuations.
Commenting, SIG Chief Investment Officer James Millard said:
“We remain overweight equities and expect them to rally this month and in 2011 as a whole.  We expect equities to continue to be boosted by three main factors.
“First, we expect the economic recovery to continue which should lead to stronger corporate profits. Recent data has suggested that the global economy is likely to grow at an above trend pace in 2011. Importantly the recent improvement in the outlook has been led by developed countries such as the US, which themselves are being led by rising consumption and investment. We expect these trends to continue.
“Second, we think that interest rates will remain at exceptionally low levels in the developed world. Although we expect growth to be above trend, most developed economies have a large amount of spare capacity (esp. high unemployment) so that this strong growth should not lead to rising inflation. We expect the European Central Bank, Bank of England, the Federal Reserve and the Bank of Japan to keep interest rates on hold until 2012.
“Third, we think that equities are cheap, especially versus cash and bonds. Corporate profits rose sharply in 2010, with earnings per share (EPS) growing at a record rate in some countries. With equities only rising 10% in 2010, P/E ratios fell sharply in 2010 and are now well below the average levels of the last 20 years. Relative to cash and bond yields, equities remain close to the cheapest of all time.”