Highlights

  • Eight months ago we departed from the consensus and took a bullish view of equities. Today many of those positions have been borne out. In the second half of 2009 the economy scored big, both domestically and abroad.
  • Earnings have also been walking the red carpet. Q4 was a second consecutive quarter of very good U.S. profits. With more than 80% of companies reporting, operating earnings for the quarter are the highest since Q3 2007.
  • Top-line growth in 2010 will depend on continued North American expansion and an acceleration of global growth. U.S. employment growth will be key.
  • Banks seem to be on the verge of jumping on the expansion bandwagon. After a long period of tightening credit standards, conditions for lending to large and medium-sized firms are easing and lending to small firms is not far behind.
  • Global merger and acquisition activity is moving again. Recent activity has been the strongest since late 2008. A turnaround in M&A activity is a sign of corporate willingness to open the spigots of investment.
  • We currently see worries over sovereign debt as the main risk to our strategy. Greek CDSs still fetch a high price, suggesting that the prospects for a rescue remain cloudy. In our view, credible austerity measures must be adopted to contain negative spillover effects to the world economy.
  • Our sector rotation remains positioned for above-trend global growth. At this point in the business cycle we are comfortable with our call to favour growth stocks and cyclical sectors. Valuations for base metal stocks are still based on a fairly conservative commodity price deck for 2010.

Where we are, where we’re going

Eight months ago we departed from the consensus and took a bullish view of equities. In doing so we were making our investment strategy consistent with our view of where the economy would be in early 2010. In a Strategy Update of last June,1 we said economic growth was around the corner, upgraded our earnings outlook to forecast a profit rebound in Q3 and Q4, went overweight on early-cyclicals in our sector strategy and downgraded gold mines at a time when many were enamoured of the shiny metal.

Eight months later, many of those positions have been borne out. In the second half of 2009 the economy scored big, both domestically and abroad. The U.S. had two strong quarters of GDP growth as emerging-market leaders like China, India and Brazil reignited the world economy. We expect global growth of 4.1% in 2010.