Equities to outperform in a volatile world

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In its latest Daily Insights report, BCA Research emphasizes that the tail risks facing the global economy and financial markets will hang over markets in 2012, making it another difficult year for investors.

“While monetary policy will remain extremely easy, low rates by themselves do not guarantee that risk assets will perform well, especially since profit margins are extremely high (i.e. the risk is to the downside). But at least valuation is reasonably attractive, said the report.

“Over the medium-to-long term, the total return on global equities should easily surpass [government] bonds, even factoring in very weak growth. For example, if we assume extremely pessimistic nominal earnings growth of 3% over the coming decade and a compression in the price-earnings ratio to 10, equities would still deliver returns above current bond yields. A more reasonable expectation for global equity returns would be something between 7% and 8% a year. For the U.S., equity returns should be around 6%, reflecting lower earnings growth and a lower dividend yield.”

In short, equities should outperform government bonds and deliver reasonable returns relative to alternatives over the medium-to-long run.

Source: BCA Research – Daily Insights, January 5, 2012.

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