Reduce to one word the primary investment theme among investment strategists for 2011, and it would be equities.
“We've had investors trying to invest on what the next crisis is going to be” and staying away from equities and other risk assets, said James W. Paulsen, chief investment strategist, Wells Capital Management, Minneapolis.
“But suddenly, if it looks like recovery might last a few years, then ... risky assets, equities, look more attractive.”
Institutional investor anxiety about recession is easing, with the consensus changing toward a view of a sustainable recovery, albeit a weak economy, Mr. Paulsen said. “That's why you are seeing (upward) changes in valuations in the stock market,” he added.
Forecasts vary among strategists.
• All predict a rising gross domestic product, ranging from a slow 2% growth to as much as 3.5%.
• Predications for the S&P 500 range from flat to a 15% return.
• The inflation rate, based on the Consumer Price Index, could range from a deflationary -3% to a modest rise of about 2%.
The Standard & Poor's 500 stock index will reach 1,425 sometime in 2011 and achieve possibly a 15% total return, Mr. Paulsen predicts.
In Barclays Capital Inc.'s Global Macro Survey of 2,007 responding institutional investors, including equity, fixed-income and hedge fund managers, 40% of respondents ranked equities as the asset class that will perform best in 2011. Commodities followed at 34%, corporate and other credit fixed income at 10%, high-quality government bonds at 9% and minor European government bonds, 7%.
For the U.S. market, the Barclays macro survey, released Dec. 14, showed 55% of respondents believe the most likely outcome for next year is a sustained period of upward, but below normal, growth in the economy without a need for further monetary policy easing, while only 6% believe a double-dip recession will occur. Some 31% see below-trend growth leading to further Federal Reserve easing, while 8% see a pickup in demand leading to sustainable growth.
Macroeconomic growth ranked as the top bullish factor for U.S. equities, cited by 26% of investors, more than twice as many as any other single factor. Only 12% believe equities will underperform.
Barclays Capital, however, is more optimistic for 2011 than the majority of investors in its survey, said Piero Ghezzi, London-based head of economics, emerging markets and foreign exchange research. For next year, Barclays Capital sees U.S. real GDP growth, adjusted for inflation, of between 3% and 3.5%. The majority of investors foresee a 2.25% U.S. real GDP growth.
“Our sense is investors have been hurt by overweighting risk to growth,” Mr. Ghezzi said.
The Barclays Capital Global Outlook report, released Dec. 9, predicts a 2011 S&P 500 level at 1,420, about a 15% gain for the year.