The year 2011 is set to continue the trends of 2010 according to wealth management firm Andrew Dalton’s investment outlook for next year. 

While 2010 proved to be a rockier road for equities than the firm forecast a year ago, it noted a cyclical recovery had taken place even though at various times during the year investor confidence was punctuated by waves of fear of European monetary instability and of Chinese monetary tightening.

As to Japan, the firm has found attractions in Japanese equities for the first time in five years, noting that its Melchior Japan Opportunities fund has begun to outperform. Nevertheless “Japan remains the joker of the pack,” says the firm.

Regarding the overall Asian market there is concern about overheating, particularly in the Far East and in markets such as India where the view is that foreign investor demand can mean the market is fickle.

Meanwhile in Europe, although the view is that a break-up of the eurozone is politically inconceivable, there will be further European monetary uncertainty. This is because the peripheral countries of the Eurozone remain in a bind and the drum beat of the need to refinance governments, banks and corporations remains loud and urgent. Although Spain and Ireland are embroiled in woes, the firm looks to Germany, Holland, Sweden and Switzerland for strength and comfort.

In the US, although regulatory and tax legislation will change the political complexion, the firm does not expect any change in the US Federal Reserve’s dual mandate to maintain price stability and to foster non-inflationary growth. A continuation of the capital equipment investment boom is expected, as is a further recovery in consumer confidence. 

Furthermore the firm says the current analyst consensus suggests that S&P 500 profits will be up 37.5 per cent this year, an estimate that is rising. The sense is that the pace of growth in the US industrial economy is accelerating and that corporate confidence is rising.

In the UK, the firm foresees a continuation of the 40 per cent aggregate earnings growth in UK profits this year, forecasting that earnings will increase further by close to 20 per cent.

The UK financial sector's profits are likely to return to pre-crisis levels in 2011. In the mining sector, which is a large part of the UK stock market, profits are likely to have matched pre-recession levels in 2010, of a little over £20 billion.  In 2011, they could increase by a further 35-40 per cent.

Another theme which is believed to benefit UK equities into 2011 is M&A. Corporate confidence is rising, profitability is strong, balance sheets are generally healthy and debt funding is becoming more readily available. The typical take-over premium seen in the UK in 2010 has been in the order of 35-40 per cent - testament to the low valuation of UK equities; examples being Chloride, Datacash, Tomkins and VT Group. Andrew Dalton firmly expects this theme to continue in 2011.

Overall the wealth manager believes that a relatively normal cyclical expansion is underway in the developed world, with US, European and UK short-term interest rates to remain anchored at a low level throughout 2011.