Expert view: 2007 financial outlook

The sector can count on a year of growth

The International Monetary Fund's 2007 World Economic Outlook says we can look forward to another year of strong growth. As always, it has highlighted the risks, pointing out that they are on the downside this year.

However, it has raised its forecasts by a further 0.25 per cent for both 2006 and 2007; in both years growth should come in at about 5 per cent.

When forecasts are raised reluctantly like this, I believe the chances of further upgrades are high and take this as a positive signal.

As one might expect, high growth in some areas, such as China or India, is likely to be offset by a slowdown in other areas - specifically in the US. European growth should remain relatively robust, with the UK expected to see growth of about 2.5 per cent.

With interest rates likely to be influenced by the strength of economies, US rates will probably come down while rates in Europe and Japan will rise. UK rates have just gone up to 5 per cent and are unlikely to go much higher; the recent weakness in the oil price should depress other inflationary pressures.

Currencies are also likely to reflect interest rate moves, suggesting that the dollar will weaken and the euro and the yen will rise. Sterling, already quite strong, could weaken slightly, although most strategists seem more concerned with weakness in the dollar.

With growth remaining robust, companies should continue to report good results. Most equity markets still look reasonable value. The UK equity market trades on a lower multiple of earnings (or profit per share) than it has done on average over the past 20 years, and should benefit from robust earnings growth. If there is a warning in the IMF report, it lies in what happens when the US economy slows. Corporate profits are already high and could well fade from here.

For charities, strong earnings should translate into strong growth in dividends. ABN Amro has forecast dividend growth of 6.6 per cent in 2006 and 5.6 per cent in 2007. After another quarter of fairly muted equity returns, charities can at least comfort themselves that their income is growing and that, in time, markets should reflect this.

KEY POINTS

- The IMF forecasts 5 per cent global growth for both 2006 and 2007

- In the UK, growth is expected to be 2.5 per cent, with interest rates peaking at 5 per cent

- A slowdown is likely in the US

- Earnings and dividends for charities should be high.

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