Strategists at Prudential are among the most bullish on Wall Street (for more very bullish outlooks please see RBC’s outlook, Merrill’s outlook & JP Morgan’s outlook). They see further government stimulus, low interest rates and the inventory rebuild driving the S&P up to 1,350 by the end of 2010 for a full 23% rally from current prices.
They believe inflation is likely to remain low as slack in the economy, high unemployment and low capacity utilization keep prices under wraps.
They remain very bullish on equity markets for 5 primary reasons:
1) GDP rebound sustaining in Q4 and into 2010, and growth expectations being revised higher.
2) Q3 earnings surprising on the upside outlook and earnings recovering further in Q4 and 2010 with solid GDP growth, widening margins and improved pricing power.
3) Inflation moving from disinflation to low inflation with excess capacity and high unemployment.
4) Global central banks holding interest rates at crisis lows levels, long-term rates remaining low, and plenty of liquidity.
5) Continued stabilization in financial market conditions and risk appetite improving further.
How to play it? They want to be overweight stocks and underweight bonds. More specifically, they prefer emerging market and UK equities with a modest overweight in the Eurozone while being underweight Japan and the U.S.
In terms of sectors they prefer energy, info. tech, and materials with a modest overweight in financials and industrials. They are neutral consumer discretionary with modest underweights in consumers staples and healthcare. They underweight utilities and telecomm.
In the bond market they like emerging markets and Japanese debt with a modest overweight in UK debt. They are neutral on the Eurozone and underweight US debt.
The tend is much the same in terms of forex. They like the Euro and emerging market currencies, remain neutral on sterling & Yen with an underweight on the dollar.