A 2009 perennial question – how long will the rally in global equities last? The answer is right through next year, if you believe the consensus view from the latest Bank 0f America Merrill Lynch fund manager’s survey.

Optimism about the economy strengthened this month. A net 80 percent of respondents expect the world economy to grow over the next 12 months, compared with a net 69 percent in November. Two thirds of investors expect equity markets to return to traditional growth levels or better.

Much of this feel-good factor is being driven by expectations of a sharp rise in corporate earnings in the new year, predicated on the assumption of continued  growth of capital expenditure.

Expectations for corporate profits are at their highest level since December 2003, supporting demand for greater capex. A net 48 percent of investors say that companies are under-investing. At the beginning of 2009 most investors thought companies were over-investing.

As such, the rally will roll on.

According to Michael Hartnett, BofAML’s chief global equity strategist, investors are looking for a 7.7 per cent total return from global equity markets in 2010.

Economic indicators lend their support to this view.  Purchasing manager’s indices, which have dramatically rebounded from the lows of a year ago, have been a good rough guide for equities over the crisis, as this European example shows:

But with great expectations comes the risk of crushing disappointment.

As Andrew Lapthorne of Société Générale noted in a report released on Monday, consensus earnings forecasts for 2010 are expecting 27 per cent ex financial profit growth next year – the highest level on record.

Cyclical sectors such as mining & industrials are currently trading at 2010 P/E multiples, nearly 15 per cent higher than the market.

But defensive sectors, such as telecoms and pharma, are trading closer to 15 per cent discounts compared with the market.

After a high beta, high risk rally for most of 2009, it is hard to see how many more positive surprises remain to keep the Great Rally in Everything going. Safety in tedium could well be the motto for next year.

As Lapthorne put it:

Cyclical sectors are nearly 30%+ more expensive the defensives, even if we assume that the optimistic 2010 earnings come through. With several cyclical indicators on the wane, and dollar strength eroding the carry trade, we would expect many investors to conclude that the safer stance is now with the defensives.

Book your ticket early to avoid disappointment.

This entry was posted by Miles Johnson on Wednesday, December 16th, 2009 at 15:28 and is filed under Capital markets. Tagged with 2010, bank of america Merrill Lynch, bear market rally, Equities, Rally, societe generale. Edit this entry.