Robust demand from emerging markets and a loose US monetary policy should boost commodity shares in 2011, though base metals could face a short-term hit as China acts to cap inflation, a senior equity trader said. Daniel Harris, head of dealing at London-based H2O Markets, said precious metals miners looked likely to benefit from further metal price gains in 2011, after a 28 percent rise in gold and an 82 percent rise in silver in 2010.
"A possible continuation of expansionary policies, particularly by the United States, given its slow recovery of the domestic economy and deflation, is likely to push the demand for bullion and silver from investors fearing inflation," he said.
"Precious metal miners such as Fresnillo provide clear market-based barometers to illustrate continued rising commodity prices, driven by the eurozone debt fears. However, we need to watch out for recent signs of stretched demand."
Harris said possible moves by China, the world's largest commodity consumer, to tighten its monetary policy in an attempt to curb high inflation is likely to temporarily cap commodity prices, possibly hurting copper and iron ore prices.
"In the mid- to long-term, however, commodity miners such as Rio Tinto, are set to benefit from rising metal prices as a result of past underinvestment and growth in emerging markets," he added.
Among other predictions, Harris said a possible slowdown in the UK economy next year threatens to reverse the improvements in impairment charges, which have been key drivers for improving profits at British banks in 2010. "Furthermore, the possibility of continued lower interest rates throughout 2011, coupled with higher funding costs, are likely to narrow net interest margins."
"We believe banks such as Lloyds and RBS will continue to underperform, while the sector picks are those with exposure to regions outside Britain and best able to weather the possible adverse domestic challenges." Harris liked HSBC, which has a far greater exposure to emerging retail banking markets than its peers, and Standard Chartered, whose commercial and wholesale banking units generate more than 85 percent of total revenues from Asia, Africa and the Middle East.
He said British retailers were unlikely to perform well next year due to a rise in value added tax (VAT) in 2011 and higher commodity prices, which will hit profit margins. "Also, rent rises are anticipated in 2011. A number of retailers are expected to launch plans put on hold during the financial crisis to expand selling space, which will in turn pressure smaller retailers."
Harris said a general lack of innovation, coupled with patent expiry among some top-selling drugs, could fuel a merger and acquisition bonanza in the pharmaceutical sector in 2011. "Small scale and innovative pharmaceutical firms could be in the spotlight as potential targets, consequently benefiting from share price rises."
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