The Globaliser 2.19.10

'Probably hit by lower city bonuses', grimaces UK Economist Michael Saunders,
'income tax receipts plus capital gains tax plunged 19.2% YoY in January, the
sharpest drop since data began… and government spending picked up in January…
contributing to a further deterioration in the fiscal deficit… reaching GBP4.3bn, a little
above our forecast and the GBP2.8bn consensus… we now expect the full year fiscal
deficit will turn out at about GBP166bn - a record high of 11.8% of GDP, although
below the PBR's forecast 12.6% of GDP'.

Top Down Analysis
Strategy

The shift in euro flows

'While European retail investors turned from net sellers to net buyers of
equity mutual funds in 09', confirms the European Portfolio Strategist, 'an
annual inflow of €7bn is hardly a figure to get an equity mutual fund manager
excited... this is also some way below the €17bn 10-yr average, which in itself is
hardly exciting... with bonds, notably US bonds, the main beneficiaries of inflows...
indeed, if only half the flows which went to bond and balanced funds in '09 were redirected to equities in '10, that would mean inflows of €25bn to equities... we
continue to be optimistic on European equities over the next 12-18-months...
recent M&A, buybacks and private equity deals in addition to modest inflows from
retail investors all suggest equities are beginning to look like good value again'.

The case for UK equities

'We find it hard to argue in favour of low-return risk free assets', chorus our
UK Strategy team, 'with loose monetary policy making risk-free assets very
expensive against risk assets... the PE on UK cash is 200x... in addition, a
combination of sticky/high inflation, the end of QE, recovering growth and
sovereign risk is likely to push bond yields higher... in contrast, we expect the
relative valuation attractions of equities to see flows turn positive in the next
year or so... and this is likely to provide support for the markets, albeit not to the
degree of the late 1990s
9CITIBANK-RESEARCH
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