Dr Oliver Plein, head of product specialists - equities, DWS Investments

Comment: Monetary policy changes key in 2011

Wed, 20/07/2011 - 06:00

Dr Oliver Plein (pictured), Head of Product Specialists - Equities at DWS Investments, takes a look at how today's environment impacts equities…

In 2011 the world economy will likely be driven by the timing and speed of monetary policy changes. In the US, the Fed is likely to remain on its current course well into the second half of 2011, whereas in the euro zone, the European Central Bank (ECB) is facing an increasingly difficult task as a one (monetary) size fits all approach does not appear to be appropriate for booming Germany as well as the stagnating countries of the European periphery. In China, many questions remain unanswered as inflation and monetary tightening creates uncertainty. Against this backdrop, we look at the current opportunities from dividend paying stocks.
 
Positive factors

Continued economic recovery: The world economy should expand at a moderate growth rate with the risk of temporary setbacks. Emerging markets – primarily emerging Asia – should remain the world’s growth engine, making up two thirds of world economic growth.  

Accommodative monetary policy: Growth and deflation worries will likely be successfully addressed by monetary policy measures. For example, additional quantitative easing. 

Corporate action: Robust earnings and healthy balance sheets allow for a pick-up in corporate activity. For example, activity such as M&A, dividend increases and share buy-backs will support equity market performance. 

Robust earnings growth: Due to a strong quarter three reporting season, global earnings recently saw strong upgrades for 2010, with Germany and Scandinavia seeing the strongest earnings upside movements. Similarly to 2010, double digit earnings growth is expected for 2011 and 2012. 

Compelling valuations: In addition to the positive earnings outlook, equities look cheap relative to cash, bonds and credit. Also, on an absolute basis, valuations remain well below their long and short-term averages. 
Risks

Sovereign debt crisis in Europe: There is still some uncertainty about the resolution of the public financing problems in the European periphery and the potential contagion effects on the core. Significant austerity programmes will likely weigh on economic growth in (peripheral) Europe. These aspects may lead to occasional spikes in risk aversion.  

Lower growth: Lower potential growth in industrial countries, adverse demographic developments, increased preference for income-producing assets and regulation may lead to a structural de-rating of equities as an asset class. 

Deflation: Deflationary environment cannot be ruled out, which could cause equity valuations to remain depressed.

Outlook

We are constructive on equities in 2011, favouring emerging market exposure and stocks with high dividend yields. 
 
Switch from bonds taking place: Many asset allocators are switching from traditional bond segments into high dividend stocks, multi asset solutions, and diversified alternative investments.


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