In its 2010 Outlook, the ratings agency says a backdrop of continuing bank deleveraging, coupled with subdued consumer demand will mean equities, particularly European equities, will be the best performer for investors over fixed income alternatives.
S&P European equity strategist Robert Quinn says: “Investors are quite rightfully apprehensive about choosing an entry point in equities. However, we challenge them as to consider what other asset classes are more attractive to invest in.”
In the report, the ratings agency says that while equities have been the biggest absolute gainers in 2009, on a risk-return basis corporate credits are the clear winners. But it warns that this will not be the case in 2010, thanks to continuing low interest rates, faltering housing markets and continued high unemployment rates.
Quinn says: “While we do not dispute that some value exists in credit, we recognise that the best conditions of wide-spread levels, decent economic growth, low default rates and improving credit quality will not be evident in 2010.”
Instead, he says the potential of European firms, and their strong trade ties with emerging markets, will make sure they are a profitable place to invest next year. Quinn predicts the German Fax will come out tops, gaining 14.7 per cent, but says most national indices will follow suit with solid performances but warns that the FTSE will lag its peers.
He says: “We expect European equities to perform well in 2010 versus historical averages and forecast a 13 per cent total return from current levels.”
While S&P predicts no miracles for the 2010 markets, it says the end of the past business cycle and this embryonic one shows signs of improvement.
Quinn says: “We do not think that there are many participants in the financial markets who volunteer a ‘new paradigm/it’s different this time’ argument for fear of ridicule.
“The equity market is neither cheap nor expensive but is worth entering, we believe. There is a healthy level of pessimism among investors that suggest to us that, if and when the ‘animal spirits’ do return, equities will capture significant capital gains.”