BNY Mellon sees rise in global equities and commodities

Jack Malvey, chief global market strategist for BNY Mellon Asset Management, expects resolution of the medium term economic fate of Europe and the US election outcome will see equities rise as much as 15% next year.

Malvey expects the strongest outperformance to occur in the second half of the year as investors begin factoring in the resumption of economic growth in 2013 and 2014.

Malvey stressed that market behaviour in 2012 should be viewed in the context of the continuing “great transition to a new conservative financial era.”  This transition marks a reversal of the increased leverage by governments and individuals in developed markets that began in approximately 1970, rose to unsustainable levels, and ended with the great recession that began in 2007, he said.

Despite the current issues surrounding the eurozone, the US budget and elections, and generally more conservative expectations for world economic growth Malvey notes that in "less than a year, I expect the medium term economic fate of Europe will be defined and the US election outcome will be known.”

According to Malvey, equities could rise in the 10% to 15% in 2012 as the probability of stronger economic growth becomes more apparent during 2012 and corporate earnings growth remains positive, although not advancing as quickly as in 2011. Other factors that could propel equity prices in 2012 would be merger and acquisition escalation, equity buybacks, dividend increases, and asset allocation shifts from bonds to equities.

“Investors are focusing more on what can go wrong instead of the potential upside,” Malvey said.  “The last few years have been rough on equities.  Folks are doing a lot of rear-view mirror gazing, looking to make same trades as in 2011, which may not be a good idea.”

Malvey noted the interest rates on bonds have been driven so low that dividend yields are now more attractive.  “The fixed income asset class is not likely to be as generous to investors as in most years since 2000,” he noted.  The Global Aggregate bond index is likely to return someplace between a negative three percent and a positive three percent due to a combination of flat-to-slightly higher medium- and long-term government bond yields, bulging government bond supply, and concerns that monetary policy will become normalized.”

Commodities could gain 10% in 2012 on expectations of economic growth normalization in 2013 and beyond, and investors continue to turn to commodities as a hedge against possible currency weakness, inflation or deflation, and general uncertainty in the traditional financial markets, he said.  Malvey excluded gold from the overall commodities group, saying this precious metal already has enjoyed major appreciation over the past several years.  Instead, he said the commodities likely to outperform are more closely tied to the economic cycles, such as industrial metals like copper.

US politics and the European sovereign debt crisis will continue to shape the course of markets through much of 2012, he said.  However, I anticipate that these uncertainties will abate as the US election in late 2012 is likely to determine future budget policies on dealing with the deficit, and Europe should be well along in resolving its sovereign and banking sector problems, Malvey concludes.