An extract of the January 2010 edition of Investment Strategy
Growth will be modest in 2010 and beyond
Economic data over the past few weeks shows that growth generally accelerated toward the end of last year in the major developed countries. This news has even left the impression that US economic activity is quite robust. Although the first estimates of GDP growth for the fourth quarter are likely to be strong, they should be taken with a grain of salt.
Stay with riskier assets for now
Recent market trends and optimism about the economy are likely to encourage investors to prefer the riskier asset classes over the near term and in particular equities, which could be boosted by good news about corporate earnings and the still buoyant environment for mergers and acquisitions.
Be more cautious later
But over the longer term, we recommend watching out for the first signs of faltering growth, which are certain to raise concerns about the recovery’s structural underpinnings (e.g. limited growth and high unemployment, much weaker public finances, consumer deleveraging and the possibility of deflation) and may trigger a resurgence of risk aversion and the end of the equity-market rally. These factors could come into play toward the end of the first quarter or sometime during the second.