Emerging markets will lead the way for the global economy in 2011, say analysts with BofA Merrill Lynch Global Research

The firm released its analysts’ forecasts for the year ahead on Tuesday. Merrill analysts are projecting global GDP growth of about 4.2%, slowing from 4.9% this year, and they say that most of that is going to be driven by emerging markets. They see emerging market growth at 6.4%.

Notwithstanding the gearing down in underlying economic growth, the analysts also see upside in stocks. Overall, they estimate that global equities will rise by about 15% in 2011. By region, they expect the U.S. and emerging markets to do relatively well. Within Europe, they see Germany leading the way.

Merrill analysts forecast that the S&P 500 index will reach 1,400 in 2011, driven by a combination of stronger earnings and some expansion in price-earnings ratios. They note that while domestic economic growth is expected to be sluggish, about 40% of U.S. corporate profits are earned overseas.

By sector, Merrill analysts project that technology, energy, industrials and materials will be the most likely outperformers in 2011. Large-cap equities are forecast to outperform small-caps (with the exception of tech) next year. Also, on a strategy basis, growth is expected to outperform value, “reflecting high dividend yields, greater global exposure and cheaper valuations”.

Additionally, they predict higher commodity prices, led by oil, copper, and coal, and a stronger U.S. dollar. Fixed income returns are projected to fall to low single digits.

“Going into 2011, the probability of market tail risks is likely to remain elevated, with the spectre of premature fiscal tightening, a double-dip in U.S. housing values, exploding borrowing costs in Europe and potential oil price spikes all looming over our forecasts,” notes Michael Hartnett, chief global equity strategist and chairman of the BofA Merrill Lynch Research Investment Committee.

IE