Rise in financial market volatility to create investment opportunities
That is according to international financial management giant, Merrill Lynch, which yesterday issued its 2007 Financial Markets outlook forecast.
The company expects to see high quality assets perform strongly in the face of rising financial market volatility, particularly if the European Central Bank and its counterpart in Japan continue to raise interest rates.
“Higher volatility can make for alarming headlines, prompting investors to shift their allocations towards assets with true or intrinsic value. We believe investors should look towards assets that will avoid, be relatively immune to, or benefit from volatility,” said Richard Bernstein, chief investment strategist at Merrill Lynch.
“Judging by historic market performance, if volatility increases, higher quality assets should outperform. In our opinion, conditions appear to be falling into place for a period of P/E (price-earnings) multiple expansion. In the past 20 years, lower-quality stocks have never outperformed higher-quality stocks when P/E multiples grow, which should lead investors to look to high quality common and preferred stocks and AAA-rated corporate debt, which is in short supply,” he added.
Merrill Lynch also believe that investors should start positioning their portfolios to take advantage of growing consumer activity in emerging markets.
“This is a theme that carries short-term risk if volatility rises, but may provide benefits over the long-term for risk-orientated investors. With China’s ‘generation Y’ (those under 27-years-old) being much more consumption oriented than many investors realise, investors should also look to opportunities in consumer finance such as credit card operators and other lenders, as the use of consumer credit is in its infancy in many parts of emerging markets,” the report said.
It added that commodities are likely to come under pressure and see returns erode this year.
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