BlackRock Forecast: 2011 may be a rerun of 2010 for global economy

London, December 22^nd, 2010 – Richard Urwin, Head of Investment within BlackRock’s Fiduciary Mandate Team, believes 2011 is likely to be another positive year for global equities and other risk assets, despite persistent headwinds. Expanding on this view, Richard offers the following outlook for the global economy in 2011:

• Inflation risk remains low in developed economies, but is more pronounced in emerging markets: For the developed economies, 2011 is expected to be a year in which central banks see inflation as too low rather than accelerating. Low inflation does not imply deflation. Indeed, if deflation risk were to rise, so should the degree of monetary stimulus from central banks.  While the inflation risk in emerging economies is significant, inflation is unlikely to accelerate substantially.

• Economic growth should continue through 2011: Global growth could be more balanced with developed markets contributing more to growth next year as the momentum built up in the second half of 2010 continues. For instance, growth in Germany, Japan and the UK in recent quarters has averaged between and 3% and 4%.

• The demise of the euro is a very low probability event: The most significant event to affect financial markets in 2010 was arguably the European sovereign debt crisis. This is likely to have a significant influence on markets well into 2011 and beyond, given that southern Europe faces an extended period of retrenchment. However, the demise of the euro is very improbable.

• There is no sign of irrational exuberance in equity market valuations: On the contrary, equity multiples towards the end of 2010 appear modest by historical standards. We believe the market reflects concerns about the length and strength of the global economic recovery. In these circumstances, additional returns to risk assets do not require utopian outturns, rather an environment in which challenging news is simply not quite as challenging as expected.

• Equity returns in 2011 will be heavily dependent on the global cycle: Valuations are not so supportive that equity markets could rise on material growth disappointments, even if these stop short of recession. In addition, corporate earnings growth could slow from the strong rates of the past year or so.  Similarly, with a moderately favourable cyclical background, most forms of credit should outperform sovereign bond returns.

• The low level of bond yields implies low returns to bonds in the medium term: However, for yields to back up significantly in 2011, one of two conditions would have to apply. Either global growth or inflation picks up enough so that central banks abandon their easy-money policy and raise interest policy rates sharply, or concerns over large and sustained budget deficits increase.

• Policy rates in developed economies are expected to be kept low: We doubt that animal spirits will recover in 2011 even if global savings fall significantly. Hence, the catalyst for significant increases in bond yields during 2011 appears lacking. This suggests that government bond yields, excluding those in peripheral euro zone countries, will remain at stretched valuations for an extended period, delivering negative real returns.

Richard commented:  “In some respects, 2011 may feel like a re-run of this year.  Equities are likely to grind higher - with emerging market equities outperforming modestly rather than spectacularly, partly as a result of currency appreciation in these markets – while commodities could make further gains as supply/demand imbalances persist.

“The most marked difference in returns from 2010 could emerge in the sovereign debt market, with the headwind of very low yields. While diversification into corporate bonds and other non-government debt could add value, the scope for material spread narrowing is more limited. In short, 2011 could be another year where many investors find it difficult to take investment risk.  It is, however, likely to pay off.”

Notes to Editors:

Richard Urwin, Managing Director, is the head of Investments within BlackRock's Fiduciary Mandate Investment team (FMIT). Mr. Urwin is responsible for asset allocation and manager selection within the fiduciary client base.
Source: BlackRock, 22.12.2010