Equity friendly conditions may reappear

Commodities will be the main focus of investor attention in 2010, while equity friendly conditions will return for the first time since 2007, according to research from Fidelity International.

Increased demand from developed economies will be the unexpected driver behind the commodities market, with the chance of strong growth coming off highly depressed bases. In the emerging markets sector, China will continue to be the focus for many analysts following the country’s double digit growth rates in recent years.

Despite this, Trevor Greetham, director of asset collection and portfolio manager at Fidelity International, said the least favourable asset classes for 2010 were fixed income, particularly government bonds. “My concern is centred on government bonds. I don’t expect governments to default on their debt. It is just that yields are already very low and they are likely to rise as central banks move progressively towards removing their ultra-loose policy stance,” he said.

Greetham also pointed to recoveries in both the US and UK housing markets going forward as long as an adverse inflation shock doesn’t force interest rates to rise rapidly.

Emerging markets have once again been mooted as key investment areas for 2010, Fidelity Asia Fund portfolio manager David Urquhart said. Although Asia’s economic recovery will probably continue, it is likely to be moderate and bumpy over the near term. Urquhart points to low-cost manufacturing as being a competitive advantage for most Asian countries, with demand for western-style consumer goods likely to remain high.

“The structural story in Asia remains intact and the region is in a fortunate position whereby government, corporate and personal balance sheets are healthy, which is a different story to many Western economies. Consumption in the region should continue to improve further as the global economic recovery continues and domestic consumer confidence rises,” he said.

India, Japan and Australia were also touted as ones to watch. While the outlook for Japan is mixed, a number of companies have surprised the market with stronger than expected results and the current economic cycle is improving, albeit at a slow pace. India’s equities should benefit from the country’s strong economic fundamentals, with less reliance on exports and strong domestic consumption being key market drivers.

At home, Australia’s resilience through the global financial crisis has made it more attractive to investors, the report said. Its strong population growth, low cost natural resource base, strong corporate governance environment and good diversity of companies means Australian assets are likely to offer greater appeal to investors going forward.