NEW YORK (The Street) -- Stocks are set for another good year in 2014, according to Bank of America Merrill Lynch strategists. The bank's strategists say they are generally positive on stocks and real estate but negative on the greenback, interest rates and commodities.
Nonetheless, the year won't be without some drama. BofA is projecting the possibility of a
"decent risk correction" next year as volatility creeps higher amid heightened risk of investment bubbles around the world.
"Next year we'll see the transition from an environment of high liquidity and low growth to higher growth and lower liquidity," said Michael Hartnett, the bank's chief investment strategist Tuesday at the Bank of America Merrill Lynch Global Research 2014 conference. "The immediate risk is boom - that you see the US economy come together and the real estate growth story become a banking lending and small business story which causes the Fed to be behind the curve [with its policies]."
Against this backdrop, BoA strategists forecast the S&P 500 to rise to 2,000 points with an average 10% gain in global equity markets. While pointing to the risk of a correction, they do not suggest this will be long-lasting.
U.S. earnings growth is likely to be around 7% next year with at least a percentage point of this to come from continued share buyback activity, the bank's head of U.S. equity and quantitative strategy Savita Subramanian said. In terms of sectors, she likes technology, industrials and energy for their high cash balances and sensitivity to economic growth.
On the flipside, she is underweight consumer discretionary, utilities and telco services. Subramanian noted that the latter two have bond-like characteristics that make them likely to underperform amid increasing rates. "A rising rate backdrop generally hurts consumption story [for consumer discretionary stocks] as on the margin, consumers tend to save rather than spend," she added. The strategist also recommends companies with overseas exposure as the global economy improves.
Among emerging market economies, Mexico, Poland and Turkey are likely to surprise on the upside in 2014, the bank said. Co-head of global economics research Alberto Ades forecasts 4.6% growth for emerging economies next year. "The easing cycle that has started in mid-2011 with many emerging market economies cutting rates will come to an end in 2014 - we [expect] 11 central banks to move rates next year, with 8 hiking and 3 cutting," he said. Ades said the emerging market economies' share of world GDP would continue to grow.
By contrast, key commodity benchmarks could shed around 3% next year amid a continued deterioration in economic activity in China. "Key commodity markets are moving to an oversupplied position," head of commodities and derivatives research Francisco Blanch said, pointing to downside risks for oil and gold
Harnett characterized 2013 as the year the global economy "cried wolf" with fears around a hard landing for China and fiscal calamities in the U.S. that did not come to pass. We go into 2014 believing the great rotation story of a normalization of macro [factors] and interest rates - we are bullish on growth."
-- By Jane Searle in New York