Volatility and risk aversion will put pressure on the loonie while U.S. Treasuries will remain the best bet for a flight to safety. The prediction forms the Canadian perspective of an economic commentary by Bob Doll, vice-chairman and chief equity strategist for fundamental equities, BlackRock Inc.

In his mid-year update to 10 predictions for the year 2010, Doll said renewed credit problems beyond the U.S. and the market correction of the past two months have created a more uncertain environment for stocks. He said, however, that equity prices would continue to climb this year as long as a renewed economic contraction is avoided.

Providing the Canadian perspective Bill Chinery, managing director of BlackRock Canada, said that with continued volatility and an increased aversion to risk highlighted by Europe’s debt problems, there will be a flight to U.S. Treasuries and resulting pressure on the Canadian dollar.

In his outlook Chinery said the gold sector should continue to shine, while the price of oil will fall. The inflation/deflation scenarios faced by the U.S. are less likely in Canada since the Bank of Canada injected very little capital to support the banks or other financial intermediaries, he said.

“Given the uncertainty surrounding the sovereign debt concerns in Europe, the Bank of Canada will likely be conservative in their future fiscal policy, to avoid introducing any volatility in the Canadian economy,” said Chinery.

As for the U.S. markets, Doll reiterated his predications for 2010, saying the U.S. economy will grow above 3% in the year and earnings will rise significantly despite mediocre economic growth.

In his initial forecast at the beginning of the year, Doll predicted U.S. stocks would outperform cash and Treasuries and most developed markets. “The ongoing structural problems have caused equities to give back the gains they made earlier in the year, and at this point, the outcome for this prediction is uncertain,” he said while maintaining that he still expects it to come true provided there is a renewed rally.

He said policymakers still have a tough job of unwinding the significant amount of stimulus that has been injected into the system. “Over the short-term, we expect the broad macro environment will continue to be buffeted by financial and economic uncertainty that will keep volatility levels elevated,” said Doll. “That said, we believe the odds for a double-dip recession are low.”

An update on Bob Doll’s 10 Predictions for 2010:

The U.S. economy grows above 3%, outpaces the G-7
“Unless the U.S. economy has a very weak second half of the year, we should get this one correct,” he says. “The United States has been significantly outpacing other developed markets in terms of economic growth, and that trend should continue as well.”

U.S. job growth turns positive early in 2010, but unemployment stays high
“This prediction should come true, since job growth has already turned modestly positive, but unemployment remains a significant concern.”

Earnings rise significantly despite mediocre economic growth
“This scenario has indeed been playing out the way we expected. The broader economy has been experiencing a sort of ‘U-shaped’ recovery, but profits have experienced more of a ‘V-shaped’ rebound. Consensus expectations are for continued strong earnings growth for the rest of this year.”

Inflation remains a non-issue in the developed world
“This prediction seems almost certain to come true, since deflation (rather than inflation) remains a more significant threat.”

Interest rates rise at all points on the Treasury curve, including Fed Funds
“This is one that we will probably get wrong this year. European credit problems have delayed the rise in interest rates, keeping central banks from tightening monetary policy.”

U.S. stocks outperform cash and Treasuries, and most developed markets
“The ongoing structural problems have caused equities to give back the gains they made earlier in the year, and at this point, the outcome for this prediction is uncertain. We still expect this one to come true, but it will require a renewed rally in equity markets later this year.”

Emerging markets outperform
“We are on the fence at this point as to whether or not this prediction will come to fruition. Emerging market economies have continued to grow more quickly than their developed market counterparts, but equity market performance has been uneven.”

Healthcare, IT and telecoms outperform financials, utilities and materials
“We are about even on this sector call at this point, and we will need to see some improvement in our favoured sectors for this prediction to come true.”

Strong free cash flow and slow growth lead to an increased M&A activity
“Certainly, merger and acquisition activity has picked up, as have dividend increases and share buybacks. We expect these equity-friendly activities to continue later this year.”

Republicans make noticeable gains in the House and Senate, but Democrats remain firmly in control of Congress
“Political fortunes change rapidly, but at this point, we are still expecting the November elections to play out as we had predicted at the start of the year.”

(07/07/2010)