ING IM cuts outlook for global economic growth, sees rise in volatility and increasing divergence in investment markets

• Test tube policies’ could contribute to further market volatility
• Positive earnings growth, attractive valuations and strong corporate wealth to drive global equity markets
• Australian economy to remain solid as Asian trade partners grow at fast pace

Global investment manager, ING Investment Management (ING IM), says global economic growth is forecast to be significantly lower in 2011 with a widening divergence in the performance of emerging versus developed economies, high volatility in markets and rising uncertainty over macroeconomic issues.

It warned that untested policy prescriptions from governments and central banks – which it has termed ‘test tube policies’ – could further contribute to significant market volatility. ING IM also said that much of the developed world has made only 30% – 40% of the adjustments needed to adapt to the new environment and challenges, and estimates there is a 60% chance that global economies and markets will muddle through 2011.

Eric Siegloff, Global Head of Strategy and Tactical Asset Allocation, said: “We are likely to face a tough and volatile economic and investment environment next year with the divergence between the emerging and developed economies widening further. Companies and investors will also need to brace themselves for unexpected consequences from the ‘test-tube’ macroeconomic strategies being employed by governments and central banks.”

ING IM expects real global GDP growth to be around 3.8% in 2011, compared with its forecast of 4.8% for 2010. GDP growth in the emerging economies is projected at 6.5% (2010: 8.1%) while forecast developed
world GDP is 1.6% (2010: 2.2%), widening the economic performance gap between the two further.

These forecasts could be further modified by the 25% possibility that the world could lurch into another serious downturn, compared with a 15% chance of a surprise on the upside with strong economic growth. Developed economies may continue to be dominated by deleveraging and output gaps that would lead to deflation and low nominal growth.

“Investors will need to take a much more dynamic approach to their investment strategies in the more turbulent and divergent financial market conditions we predict in 2011. This means a greater focus on growth, and in particular dividends, income and yield – or what we call ‘DIY’, added Mr Siegloff.

“With such a high degree of uncertainty, investors need better risk management and a total return approach instead of focusing on benchmarks. In the low return world we are predicting, beta alone will not deliver. You need to place a greater focus on asset managers who can consistently provide alpha,” he said.

Australian economy remains well positioned

The Australian economy is growing solidly with output and income growth strengthening and unemployment falling. While growth in the major advanced economies is expected to slow, the emerging economies of Asia are continuing to grow strongly.

As a result, Australia’s major trading partners are expected to grow at their fastest pace in over 20 years and this is boosting global demand for commodities and driving Australia’s terms of trade. According to INGIM, this surge is expected to provide substantial impetus to domestic growth, supporting rising incomes and activity, underpinned by strong growth in exports and business investment as we move froward into 2011.

James Wright, Chief Investment Officer and Head of Australian Equities said: “We expect the Australian economy to grow more strongly than the rest of the developed world in 2011. While inflation is expected to rise, the withdrawal of monetary and fiscal stimulus and the appreciation of the Australian dollar will help to contain demand and inflationary pressures.”

2011 equities outlook

Global equities

ING IM believes the key drivers for global equity markets in 2011 will be positive earnings growth, attractive valuations, abundant liquidity and strong corporate wealth. These will underpin three strong themes for next year – sustainable income and growth, increased corporate spending, and emerging markets.

Sustainable income and growth: Here, dividends will become an even more important income generator, while low payout ratios, strong balance sheets and high profitability will support further growth.

Corporate spending: Corporate confidence is rising, and strong cash flows and balance sheets will lead to increased activity in buybacks, dividends, M&A activity and capital expenditure.

Emerging markets: There are still many attractions here for investors, including low public and private debt levels and high economic growth. ING IM still believes that emerging market equity valuations are not in ‘bubble’ territory as some market commentators claim.

“The 2011 outlook for global equities is good and we expect returns to be in line with earnings growth. However, investors will need to focus on yield and also on growth markets,” said Mr Wright.

Australian equities

ING IM. believes solid population growth and the demand for raw materials, as well as robust employment will be positive for Australian equities

Just like the two-speed world expected in 2011, in Australia the two-speed economy is expected to continue, with the industrial sector more closely tied to developed market demand and the buoyant resources sector tied to emerging market demand.

“Strong business investment, rising commodity exports and robust income growth supporting household consumption will continue into 2011 which will support the local markets. However, we do expect continuing volatility which will create value-capture opportunities for active managers,” said Mr Wright.