Recovery in global economy continues

The global recovery, which started in the second half of 2009, is expected to continue. It is driven by strong fiscal stimulus and extremely accommodative monetary policies. The recovery is boosted by strong emerging markets growth from which export sectors in Europe (Germany) and Japan will benefit most. Domestic sectors in the US, Europe and Japan are hampered bydeleveraging, unemployment fears of consumers and only very limited wage growth. That is why economic forecasts are surrounded by biguncertainties. As a consequence, possibly later in 2010, consumer spending could disappoint and / or policy makers could gradually reduce their emergency measures. In our opinion, in the developed economies (US, Europe, Japan)inflation will be low in the foreseeable future. However, inflation fears could revive temporarily.

Outlook 2010 (%)

Extreme accommodative monetary policies stable, low bond yields
Official central bank rates in the developed economies are at historical lows. The Federal Reserve and the ECB might increase their rates slightly, from the end of 2010 onwards. However, rates are not expected to reach ‘normal’ levels any time soon. News on a reduction of unorthodox monetary measures, such as quantitative easing, and / or somewhat higher official rates, could lead to volatility and upward pressure on bond yields. Considering the low inflation environment, such upward pressure is generally expected to be limited. Risk premiums in (high yield) credits and emerging market debt have come down substantially from extremely high levels. In the longer-term we maintain our positive view on these categories.

Favourable environment for global equities
In the coming months the environment for global equities continues to be favourable, driven by strong earnings growth, low interest rates, liquidity flows and more activity in M&A. Later in 2010, risks could increase, e.g. because earnings could disappoint as a consequence of deleveraging by consumers and / or unemployment fears. Emerging market equities and European equities offer the best opportunities (total return forecast approximately 20% until end 2010). For US equities and Japanese equities we expect total returns on average of around 10%.

US dollar, oil prices, real estate equities
The US dollar is clearly undervalued versus the euro. When investors become more risk averse, the dollar (a traditional safe haven) could gain against the euro. In our opinion strong oil demand from China and other emerging economies is expected to drive oil prices in the longer-term. On the back of an abundance of liquidity, real estate stocks have priced in a market recovery. This premium pricing might make the category vulnerable for disappointing news.