The fund manager said the current rally would be supported by further releases of good economic data over the coming months.
However, it warned that growth thereafter is likely to stagnate through much of 2010. This echoes widespread belief that the performance graph curve for equities will show what LGIM describe as a square root-shaped recovery – others have labeled this a hook-shaped or crooked w-shaped recovery.
Georgina Taylor, equity strategist at LGIM, said: “Our core scenario assumes the global recovery starts later on this year, but growth will remain below average in 2010.”
Some have been surprised at the speed of this turnaround in prices, but Taylor pointed towards a number of economic indicators that confirmed the worst of the downturn appeared to be over.
These were that three-month rates for interbank lending (Libor) had peaked, that the yield curve had troughed and that real oil prices had peaked.
She factored in the expected improvement of credit availability and the peaking of unemployment in around 10 months’ time as other key turning points.
However, Taylor warned that the recent recovery was vulnerable and that only by late summer would it be certain if would last.
In a deflationary scenario that LGIM has mapped out for FTSE 100 shares with a long-term growth rate of only 2%, valuations could drop by 36% to around 2,750. This would assume zero profit increases in 2010. In a boom scenario with profits increasing by 20% in 2010 and a long-term growth rate of 4.25%, valuations could rise to around 6,500 – a 48% rise.
The prospect of a crooked w-shaped recovery in equity prices is a view shared by several other fund managers, including Pimco and Merrill Lynch.
