A strong rally in global share markets ended 2010 on a high note and the global economic recovery remains on track.
Forecasts for world growth during 2011 are being upgraded and this is providing a good kicker to equity markets.
Reasonable company valuations and global financial recovery are positive factors for the
next 12 months.
What about Australasian shares?
Australasian shares underperformed global shares during 2010.
In comparison to New Zealand, they offer better upside through their link to the resources sector, which is being boosted by strong demand for commodities due to emerging market growth.
Will emerging market shares continue to grow?
Emerging market shares have significantly out-performed developed market shares since the end of 2008.
Emerging market inflation trends are one of the biggest risks, particularly if inflation takes hold and policy makers are too slow to react.
Higher food prices are currently behind many of the rise in inflation measures.
Emerging market economies will continue to grow well in excess of developed market economies for the foreseeable future.
What about property and infrastructure investments?
The listed property sector remains on an upward trend.
However, after significant out-performance through most of the year, global-listed property under-performed global equities in the last quarter of 2010.
Large companies have been able to raise new capital to repay debt and acquire new properties at distressed prices.
This supports the sector's outlook, despite sluggish economic recovery in the developed world leading to higher vacancies and low rental growth.
The outlook for domestic listed property remains uninspiring, with upward pressure on vacancy rates and declining rental growth.
And commodities?
During the past year, prices for energy and industrial metals have been relatively weak, while precious metals, agriculture and livestock have had a very strong year.
That said, we have recently seen better price action in cyclical commodities such as energy and industrial metals.
This trend is expected to continue through into early 2011.
Supply conditions remain tight while global demand is improving.
Is there potential for increasing interest rates?
In the September quarter, the bond market was well supported as investors remained concerned about a possible double-dip recession scenario in the United States and concerns about the stability of the euro area lingered.
There is scope for a moderate increase in international bond rates as investors warm to the improving trend in economic indicators.
Domestically, low, long-term government bond and swap yields point to modest returns.
Why is the New Zealand dollar over-valued?
The dollar is being driven by a range of factors, including firm commodity prices, investor risk appetite and a widening in the spread between New Zealand and United States interest rates.
Expect the dollar to largely track risk appetite in the near-term.
In a long-term context, it looks significantly over-valued against most currencies, other than the Yen and the Australian dollar.
- Allan Williams is an adviser with Spicers Portfolio Management
