BofA Merrill Lynch Global Research Forecasts Higher Global Equity and Commodity Prices and a Stronger Dollar for 2011, but Continued Modest Global Economic Growth

NEW YORK--(BUSINESS WIRE)-- BofA Merrill Lynch Global Research forecasts that 2011 will be a year of modest global GDP growth and excess liquidity that will translate into higher global equity prices, led by the U.S. and emerging markets, modest returns from fixed-income assets, a stronger U.S. dollar and another positive year for commodity prices.

In its 2011 Year Ahead outlook, BofA Merrill Lynch Global Research projects that the cyclical bull market in risk assets that began in March 2009 is not yet over, and is forecasting global economic growth of approximately 4 percent during 2011. The team believes that the key driver of many of the economic, policy and market stories in 2011 will be the large gap in economic performance between developed and emerging economies; the team estimates that emerging markets will account for over three-quarters of global GDP growth.

“The world is still healing from the wounds of the economic crisis, so we believe the U.S. economy will muddle through in 2011 and global economic growth will slow modestly compared to 2010,” said Ethan Harris, head of Developed Markets Economics. Michael Hartnett, chief Global Equity strategist and chairman of the BofA Merrill Lynch Research Investment Committee (RIC), added, “But we also remain bullish on risk assets and believe that global equity prices will rise by more than 15 percent, with the S&P 500 index reaching 1400, roughly 9 percent higher from where it is now.”

Ten Macro Calls for 2011

• The U.S. economy will muddle through.According to Harris, the U.S. economy will grow by roughly 2.8 percent, with growth slowly picking up through the year. Capital expenditures and corporate spending will be much stronger than consumer spending, which will suffer with the unemployment rate not much lower than it is today. Core inflation is expected to remain lower than consensus forecasts and stay at one percent over the year.
• Global economic growth will slow modestly from 2010. Harris also forecasts that global GDP growth will slow from 4.9 percent to 4.2 percent, though emerging market growth will remain robust at 6.4 percent, accounting for three-quarters of global GDP growth for the year. In those emerging markets, Alberto Ades, co-head of Global Emerging Markets Fixed Income Strategy and Economics, says that domestic demand will replace exports as the primary driver of that growth. He also forecasts that external current surpluses will decline in emerging markets, and that the pace of exchange rate appreciation will continue to slow down.
• Fixed income returns to fall to low single digits. Jeffrey Rosenberg, head of Global Credit Strategy and U.S. Fixed Income Strategy coordinator, believes that relative to the past two years of double-digit fixed income returns, next year marks a significant decline in return expectations. High Grade corporate bonds will post modest positive returns in the intermediate-term maturity range, but returns from Treasuries could be negative. With the Fed on hold and continued demand from mutual funds and foreigners, fixed-income markets are not expected to suffer big losses, but according to Head of U.S. Rates Strategy Priya Misra, yields should continue to rise modestly in 2011.
• Munis will provide some of the strongest fixed-income returns in 2011. Head of Municipals Research John Hallacy's 2011 forecast is for the long end of the curve to cheapen, or increase in yield, by 35 bps to 50 bps or more. While municipal bonds may face headwinds early in the year as states across the U.S. announce fiscal austerity, Hallacy feels that municipal issuers will still experience efficient financing and buyers will have many investment choices. Discussions about the extension of the Build America Bond program are ongoing but still face an uphill climb.
• Investment-grade and high-yield credit spreads tighten further. Investment-grade and high-yield credit spreads will tighten further, as liquidity in the credit markets should continue to drive returns in the year ahead. Rosenberg forecasts around a 10 percent return on U.S. high-yield bonds and around 7 percent return on emerging market corporate bonds. Forecast returns from U.S. investment-grade bonds of 2.5 percent in 2011 would be significantly lower than those in recent years.

• The cyclical bull market in equities that began in 2009 is not over yet, as global equity prices will rise by more than 15 percent in 2011. According to Hartnett, both U.S. and emerging markets are forecast to outperform relative to global equity markets. Though peripheral Europe will continue to face debt issues, core European equities, led by Germany, have another 15 percent upside. While Asian equities have richer valuations and face rising inflation, Asian Equity Strategist Sadiq Currimbhoy forecasts low double-digit gains in Asia.
• The S&P 500 index will reach 1400 in 2011 based on a $93 EPS estimate. The third year of a presidential cycle is typically the best year, with average returns of 14 percent, according to head of Technical and Market Analysis Mary Ann Bartels. Both she and David Bianco, head of U.S. Equity Strategy, believe “BIG” (Big International Growth) sectors such as technology and energy will be the most likely outperformers in 2011.
• Large-cap equities are forecast to outperform small-cap equities (with the exception of technology) next year. According to Steven DeSanctis, head U.S. Small Cap Strategy, high valuations, lofty earnings expectations and low equity manager cash levels are headwinds for small cap stocks. Meanwhile, growth is expected to outperform value, reflecting high-dividend yields, greater global exposure and cheaper valuations.
• The U.S. dollar will strengthen against the euro and the yen. As Europe struggles with persistent sovereign debt issues, David Woo, head of Global Rates and Currencies Research, expects the euro to be the weakest developed market currency in 2011, falling to USD 1.20 by year’s end. Investors looking for significant appreciation of the Chinese RMB will be disappointed, as only a small move is expected over the next 12 months.
• Commodity prices will rise, led by oil, copper, and coal. According to Francisco Blanch, head of Global Commodities Research, oil may rise to $100 per barrel, and copper is forecast to average $11,250 per metric ton in 2011. Coal faces supply restraints and is heavily geared toward emerging market growth. Precious metals will continue to benefit from inflation and sovereign debt fears, and gold could reach $1,500 per ounce. In contrast, agricultural commodity prices are more likely to fall in 2011.

“After the epic market drama of 2008 and 2009, arguably the biggest surprise of 2010 was the normality of asset price returns,” said Hartnett. “Going into 2011, the probability of market tail risks is likely to remain elevated, with the specter of premature fiscal tightening, a double-dip in U.S. housing values, exploding borrowing costs in Europe and potential oil price spikes all looming over our forecasts.”

Ten Investment Themes for 2011

In the recently published December RIC Report,the BofA Merrill Lynch Research Investment Committee identified 10 key themes for 2011:

• The Scarcity of Yield:In another year of short-term rates close to zero in the developed world, the RIC believes investors will continue to seek out high yield in both fixed income and equity markets. High-yield and emerging market bonds are forecast to return 5 to 10 percent in 2011. The RIC continues to recommend Master Limited Partnerships and REITs, while investors should avoid “dividend yield traps,” where dividend yields look high because stock prices have fallen faster than dividends can be cut.
• Rising Rates:We expect the Fed to be on hold until March 2013, but prudent investors should begin to plan in 2011 for an eventual rise in interest rates. Investors who are willing to move down in credit quality should consider senior loan funds, where yields are relatively high and coupons are likely to rise with short-term rates.
• Fiscal Retrenchment:The RIC believes that fiscal austerity is most likely to benefit bonds of high-quality municipal issuers, and for investors in higher tax brackets, higher-quality general obligation bonds at the state level and essential purpose bonds at the state and local level are recommended.
• The Emerging Market and Asian Consumer:The “value-added carry trade” should boost the stock price of large-cap multinationals in the U.S., Europe, and Japan that are smartly deploying capital in emerging markets to access consumption. These companies are a cheaper way to reach those consumers than many emerging market consumer companies.
• Returning Shareholder Value:Excess cash on corporate balance sheets and greater corporate confidence should spur corporate spending, M&A, and share repurchases. The technology and industrial sectors are likely to benefit from stronger business spending. Companies with a large exposure to U.S. discretionary consumer spending should be avoided.
• Small-Cap Tech:Driving these stocks are strong growth potential, relatively cheap valuations among all small-caps, strong earnings revisions and substantial overseas earnings exposure. Small-cap tech companies, given their solid balance sheets, are also strong takeover candidates.
• Germany:Germans make the cars and machines that people and industry want to buy. We expect solid growth, aided by strong finances and a weak euro. German business sentiment recently hit a 20-year high, and unemployment fell to a 20-year low.
• Scarce Resources:Robust demand from emerging markets combined with constrained supply, make commodities very attractive. Copper, oil, and coal could have substantial upside.
• Active Management:In 2010, massive outflows into fixed income and passive strategies punished active managers. However, fundamental strategies may return in 2011. Active manager performance has already begun to improve, and fundamental stock selection strategies have historically outperformed after periods of high correlation.
• Hedging Risk:The RIC acknowledges the potential of “tail risks,” and many asset prices move together when a tail risk strikes. The RIC indicated that it views equity options to remain among the best tail hedges, because they are cheaper than other hedges.

BofA Merrill Lynch Global Research

The BofA Merrill Lynch Global Research franchise covers over 3,200 stocks and 880 credits globally and ranks in the top tier in many external surveys. Most recently, the group was named 2010 Top Global Broker (second consecutive year), Top Europe Broker, No. 2 U.S. Broker and No. 3 Asia broker by Financial Times/StarMine. The team was also named Best Brokerage by Forbes/Zacks for the second consecutive year.

In addition, the group was named No. 1 in the 2010 Institutional Investor All-Emerging Europe and All-Latin America Research team surveys and No. 3 in the 2010 Institutional Investor All-America Equity, All-America Fixed Income and All-Europe Research team surveys. The group was also the winner of the Emerging Markets’ magazine EM Research Global Award for 2010.

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