SWIP expects to see further market gains in 2007

2006 provided plenty of challenges for global equities says Scottish Widows Investment Partnership (SWIP). Despite this, markets have proven to be resilient and SWIP expects to see further gains in 2007.

UK equities have enjoyed a good year as merger and acquisition activity, fuelled by cheap debt, has given a boost to markets. In 2007, SWIP expects the UK economy to moderate with the overall slowing of global economic activity, led by the US. However, US economic activity will pick up in the latter stages of 2007 and, overall, SWIP forecasts UK equities to perform reasonably well.

Robert Waugh, Head of UK Equities, at SWIP comments: “At present, company valuations look fair on their own merit and particularly when compared to gilts and equities in other regions. We expect the UK market to perform in line with profits growth in 2007, with gains of around 5% to 8%.

“The SWIP UK team will continue to identify the best opportunities through in-depth analysis of companies. This approach brought us winners like London Stock Exchange, Persimmon, Intercontinental Hotels and Drax in 2006.”

Collectively, European markets have been the best performing developed markets in 2006. However, the Euro area is sensitive to any marked slowing of the global economy, particularly as European interest rates are on an upward trend. Despite this headwind, SWIP is looking for European equities to perform reasonably well in 2007 with earnings growth of 8% providing the main driver over the year.

Nigel Bolton, Head of European Equities, at SWIP comments: “Stock selection will be very important in 2007 as the risk of earnings disappointment will be higher. We will continue to look at some of the basic material stocks, especially those

with exposure to zinc, where the supply-demand balance looks attractive. Pfleiderer, the German based wood company, should have a strong year in 2007 and Air Berlin remains on our radar, providing a strong impetus with a cheap valuation coupled with strong earnings growth.”

SWIP has benefited from global emerging markets outstanding returns over the past three years. One of the big reasons for their rise has been the surge in commodity and energy prices, with the overall effect on the oil and mining industries in regions such as Russia, South America and Asia being overwhelmingly positive. As global economic activity is set to slow next year, it will undoubtedly have some impact on the world’s emerging economies. SWIP expects returns from emerging markets to remain competitive, with company valuations still looking reasonable and commodities and oil continuing to provide support.

Kim Catechis, Head of Global Emerging Market Equities comments: “SWIP plays a very simple game when it comes to picking emerging market stocks: looking for well managed companies that have good, long-term visibility of organic growth. We continue to find strong ideas which are attractively valued in a variety of sectors. Companies such as SASOL in South Africa, Lukoil in Russia, Banco Itaú and Petrobrás in Brazil, Infosys in India and Ping An in China are well placed in their respective sectors to drive earnings going forward.”

SWIP will continue to identify winning companies in 2007, through company analysis forecast over a five-year period. By taking a longer view than the market, SWIP believes its research-based approach gives it a significant advantage.