Daily News: May 29, 2013

BofA Merrill, Others Identify Trends Driving Economic Change

A resurgence of American innovation, a slow yet steady shift into equities and away from bonds, and rising levels of wealth in emerging markets are reshaping the U.S., world economies and financial markets, according to “A Transforming World,” a report and webcast from top thought leaders in BofA Merrill Lynch Global Research, Merrill Lynch Wealth Management and U.S. Trust.

“A Transforming World” identifies three themes underlying the changes underway: a resurgence of business and technology innovation in the U.S. that could revitalize the economy; shifts in the financial markets away from fixed income and towards equities; and a rebalancing of the world’s economic, political and social power towards emerging markets.

“This analysis reflects the insights we gain through the power of our global connections,” said Bank of America CEO Brian Moynihan. “It is clear from the way that financial markets and economies are linked that investors have to consider both opportunities and risks. In this report, our experts help sort through those.”

A revival of U.S. innovation

Optimism has come into vogue about the U.S.’s long-range prospects. This confidence is driven by changes in business and technology, including energy, labor market shifts and technology innovation:

U.S. citizens and corporations still receive more patents than those of any other country in the world, and the U.S. invests more in R&D than China, Japan, South Korea and Taiwan combined, generating technologies such as digitalization, cloud computing, custom manufacturing and quick time-to-market design.

Shifts in the financial markets

Risk-aversion has kept investors overweight in cash and conservative, bond-heavy allocations since the financial crisis. However, low inflation and low interest rates are fueling a surge toward equities as investors seek yield:

  • Between November 2012 and mid-March of this year, $30 billion more flowed into than out of stock funds.

  • Despite the flows and stock market highs, opportunities remain. Equities are still valued at a discount because, even as stocks are rising, so are earnings expectations. As a result, the price/earnings ratio is 14.5 times projected 2013 earnings, below the 15.5-16 times earnings deemed fair value.

    A global rebalancing

    Some of the most profound transformations involve demographics and shifting alignments of global power and wealth, driven to a large degree by economic growth in emerging markets.

  • By 2030, the number of people worldwide defined as middle class will likely double to 2 billion, with most of the growth coming in today’s emerging markets.

  • As the world’s middle classes expand and grow richer, consumer consumption will rise.

    To read the entire news release, click here.