Equity Report

Many will be closely watching the actions of the US Federal Reserve over the next few quarters. The Cleveland branch of the US Federal Reserve (above).

In 2010, we expect global equities to outperform their fixed income counterparts. A substantial amount of assets remain on the sidelines despite the recent run up in equities (there was actually a negative fund flow in 2009 to global equities). We anticipate a greater appetite for riskier as-sets for both institutional and retail investors which will benefit equity prices.

Credit conditions and liquidity continue to firm up, which will assist equities in growth in 2010. Rates and cost of capital remain attractive. We do not anticipate monetary policy to tighten until the later half of 2010 and should impact the market more in 2011.

Corporate profits have im-proved substantially since 2008 with an increase in overall de-mand (still below its historical average), higher labor produc-tivity and effective cost-cutting procedures. Additionally, cor-porations have continued to shore up damaged balance sheets, which has become an extremely important measure for investors when considering investments.

In terms of valuation, prices have returned from their rock-bottom levels but remain rela-tively inexpensive, particularly in the growth sector. Talented active managers will be able to snatch up strong growth companies at discounted prices.

As always, risks remain in equity investing, with many of them linked to the health of the overall economy. We see the major risks to continue to be suppressed consumer de-mand, labor weakness and anemic (but improving) inves-tor confidence.

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