2010 will be a good year for equities, which are expected to outperform government bonds, said Bill O’Neill, the portfolio strategist in the chief investment office of Merrill Lynch Wealth Management, as he stressed that governments will have to be careful when exiting their stimulus policies, in order to meet exactly the point when the private sector can take over again.

Although the recovery is underway, Mr O’Neill stressed that “a lot of work still has to be done.” Nevertheless, he does not believe that the much speculated about worst-case scenarios, such as a consumer-led second round recession or hyper-inflation will take place, and he does not judge a "double dip" in the global economy to be likely in 2010.

Merrill Lynch expects the global economy to grow by 4.3 per cent in 2010, after shrinking by nearly one per cent in 2009. Mr O’Neill does not expect the new growth to be accompanied by an inflation risk.

He said equities will benefit especially from growth in Asian markets and that emerging markets equities therefore can be expected to outperform those in developed economies. While expecting equities to outperform corporate and government bonds in 2010, Mr O’Neilll also said that they are no longer cheap, but at about a long-term average.

Mr O’Neill also does not expect a dollar crisis; in fact, he believes the very opposite and expects the dollar to rise. He added that, in addition to the recovery of the dollar, the currencies of BRIC nations are expected to appreciate further in 2010.

In commodity portfolios, Merrill Lynch Wealth Management recommends focusing on metals and precious metals. Mr O’Neill especially singled out copper and nickel.

At the moment, the political stimulus packages are still in place with, for example, the lowest interest rates for 60 years in the US and the lowest interest rates since the 17th century in the UK. The governments will have to start putting policies in place to hand control back to the private sector soon, he said.

However, overall, conditions are looking up, he told the press yesterday, as industrial production, which bottomed last year, has been picking up again. This represents “the first stage of a conventional economic revival”, in his view.

Nevertheless, Mr O’Neill does not expect this recovery to be job-rich in Europe, including the UK. This is because, with the exception of Spain, the rise in unemployment in the larger European economies was disproportionately small compared to the fall of GDP.

Merrill Lynch forecasts interest rates at the end of 2010 to remain at 0.1 per cent (year-end 2009) in the US and Japan, while rising in the UK from 0.5 per cent to one per cent, and in the Eurozone from 1 per cent to 2 per cent. In China and Brazil, rates are expected to remain the same, at 5.3 per cent and 8.8 per cent respectively. India’s interest rates are expected to have risen by the end of 2010 to 4.8 per cent (from 3.3 per cent at the end of 2009) and Russia’s to have fallen from 9.5 per cent to 8 per cent.

Merrill Lynch Wealth Management’s key recommendations:

Strongly preferred:

- Emerging market equities

- Global cyclicals

- Selected mid-caps from certain countries

- BRIC currencies

Preferred:

- UK equities

- Tech / Industrials equities

- UK commercial real estate

- Gold

- Investment grade corporate bonds

Neutral:

- US equities

- Eurozone equities

- Emerging market debt

- High yield debt

Least Preferred:

- Commodities excluding metals

- Japanese equities

Avoid:

- G7 government debt

- Euro