Equities will lead field this year, says Talbut

Equities will deliver a return of more than 10% this year, according to Robert Talbut, chief investment officer of Isis Asset Management. He says the best buying opportunities are in Europe and Asia.

Despite concerns about a recurring threat of deflation, a combination of the budget deficit and a so far jobless recovery in the US and overheating in China, Talbut argues that equities offer more attractive potential returns than bonds or cash.

His confidence reflects his belief that corporate earnings will grow by between 10-15% this year: “Such growth will be underpinned by continuing low interest rates in the developed nations. The market is currently anticipating significant rate rises, but I believe these will fail to materialise. This is based on our belief there will be relatively strong economic growth, low inflation and low short-term interest rates. More than 50% of the time, equities either rise or fall by 15% in a year.”

Talbut also goes against the consensus belief by suggesting that US interest rates will not rise until 2005: “The Federal Reserve is determined to avoid the mistakes of Japan and not raise interest rates too early and thus choke off the recovery.”

Talbut also argues that the dollar has further to fall, which will benefit the global economy. He says it may reach 1.30 against the euro and 1.90-2.00 against sterling within 12 months: “The dollar needs to continue to decline because it is over-valued. It is good for the global economy as it encourages other regions to adopt pro-growth policies.”

Talbut identifies Europe and Asia as good buying opportunities for different reasons: “Europe has cheap valuations on an historical basis and relatively to other regions. Expectations about Europe are also low.

“Asia will do well because all manufacturing and service companies are looking to outsource jobs, both low and high level, to the region and China is the engine of growth. Asia also benefits from a falling dollar.”

While Talbut says equities are cheaper than bonds and cash, he adds that they are neither cheap nor expensive, based on projected future earnings growth: “This is unlikely to be an environment for a classic bull or bear market. I see many short-lived baby bulls and bears.”