GLOBAL - Inflation is likely to remain low in 2010 and the US equity market will outperform other developed markets, according to BlackRock's Bob Doll.
In his annual top 10 predictions for 2010, BlackRock's vice chairman and global CIO for equities said whereas last year was a ‘tug o' war' between deflation and reflation, 2010 is expected to be similar although the pressure this time will be between cyclical stimulus and the structural problems created by developed countries through high levels of government debt.
Whereas a normal cyclical growth recovery would be predicted to generate 5% growth in the United States, Doll is this year predicting GDP will return to 3%. Largely because many of the spending requirements sparked by last year's quantitative easing programmes in western nations are likely to have to be met this year, at the same time as companies are keeping costs tight.
"Government stimulus passed last year will see spending for that this year - another reason to think growth will be good," said Doll.
In particular, he predicted companies will see growth as many ran their inventories down last year during fears of a US depression but will now seek to restock as fears subside, generating strong productivity again.
This is likely to lead to a u-shaped economic recovery of 3% GDP alongside a v-shaped corporate recovery where profit margins could improve by 20-30%.
Similarly, Doll predicted the US would outperform developed countries because firms have learned to keep costs tight over many years yet indications suggest European companies may need to cut costs further and have no room for manoeuvre.
That said, he believes M&A activity could increase again this year as companies with strong cash flow will seek to tap local business opportunities.
And much like last year, healthcare and technology are expected to be overweight sectors this year while financials, utilities and materials will remain underweight.
Doll also said interest rates will slowly begin to rise towards the end of the year, offering improvements to the Treasury curve, but that inflation will also remain low since recovery usually sees inflation fall for 18 months after the first signs of a recovery.
He claimed excess capacity in some markets is still visible so the prospect of high earnings growth and subsequent inflation is unlikely, especially in the US where a 10% unemployment rate is likely to mean few signs of wage increases.
Capital markets are also predicted to outperform cash and government bonds again this year.
One of the key drivers this year will be emerging markets economies, according to Doll, as developed markets are predicted to improve by 2-2.5% while emerging markets will gain 5% in 2010 through higher profit and lower leverage, thanks to their "absence of structural problems in debt which will hold Western Europe and the US back more in spending".