Low interest rates are set to persist in major economies over the coming months. As such the search for yield will continue to drive investors in 2011, while East and West will become increasingly polarized in both economic performance and monetary policy.
Along with abundant liquidity from central banks, the quest for yield will boost asset prices in the coming year, favoring equities, corporate bonds and real estate over government bonds and cash.
Recent months have seen excess liquidity find a home in emerging markets. There is no doubt that developing regions will power global growth in 2011 and beyond, and that revenue expansion will remain scarce for companies without exposure to them. But although superior earnings and dividend growth will remain a feature of emerging market corporates, valuations are rising, so that developed market multi-nationals may now be an attractive alternative way for equity investors to harness growth potential.
Investors in all asset classes are braced for further financial market volatility in 2011, with fears over sovereign debt and inflation bound to spook markets. For our part, we believe the year will see inflation and consequent monetary tightening in emerging markets, but that inflationary pressures in the West will be subdued thanks to anemic economic growth and fiscal retrenchment.
With developed market interest rates remaining highly accommodative until well into 2011, government bond yields will be capped and yield curves will flatten. Peripheral European government bonds will inevitably be volatile given those continuing worries about sovereign debt and the future of the euro (investors shouldn't underestimate the political will to save the currency, incidentally). Among fixed income assets, current spreads suggest that the best yield opportunities are in non-government bonds and emerging market debt, particularly given a positive outlook for defaults, and in emerging markets, generally sound economic fundamentals.
Evidently, equity dividend yields are very competitive compared with government bonds, but real estate too holds something of a yield advantage. Although broadly speaking global property yields are below their long-term averages, they remain compelling relative to other asset classes. Prime assets will remain the focal point for risk averse investors seeking a secure income stream, but secondary property is beginning to look attractive on a selective basis particularly where asset management potential exists. Certainly, weak development activity across all property sectors should support medium term rental growth once a sustainable recovery arrives.
Mike Turner, Head of Global Strategy and Asset Allocation, Aberdeen, comments: "In 2011 and beyond, global economic growth will be powered by Asian and emerging regions - indeed we'll see an increasing polarization of East versus West in terms of economic performance and monetary policy. Investors may continue to worry about inflation, but thanks to anemic growth in the developed world, we think the threat is confined to emerging regions.
"G7 liquidity will provide a robust cushion for global asset prices, but volatility is likely to be sustained and correlations high, lending alternative assets a greater role in smoothing multi-asset portfolio performance. Overall, the search for yield will be an important driver of return, favoring equity and credit markets as well as real estate over government bonds and cash."
Source: Maitland
