Merrill advises investors to stick with quality bets

"It's only when the tide goes out that you learn who's been swimming naked." Wise words from one of the world's most venerated investors, billionaire Warren Buffet.

With such an abundance of investment advice washing around these days, it can be difficult to distinguish between the true experts and the bluffers.

Merrill Lynch describes itself as one of the world's leading wealth management companies and the fact that its equity and bond research is consistently ranked highly in investor surveys lends weight to this assertion.

So whether you are a keen investor or just enjoy the occasional dabble in the stock market, it could be worth listening to what the group has to say.

Steven Miley, global technical analyst at Merrill Lynch, was in town this week and gave a sneak preview of his predictions for 2007, which he will soon be dispensing to the bank's well-heeled private clients.

On the global equity front, Miley remains positive. He believes that the corrections in the markets which occurred in the second quarter of last year wiped out any "over-extension" and says that this gives scope for new cycle highs in global equity markets this year.

In Merrill Lynch's recently-published 2006 Recap/2007 Year Ahead report, the bank predicted that greater volatility would occur in financial markets this year if central banks in Europe and Japan raise interest rates, as expected.

Richard Bernstein, chief investment strategist, says that, although higher volatility "can make alarming headlines", it can also create attractive investment opportunities.

Merrill advises investors to shift towards high-quality assets - such as AAA-rated corporate debt and high-quality preferred stocks - which tend to outperform as volatility increases.

In terms of specific markets, Miley says that the Nikkei has demonstrated impressive resilience. Despite a possible correction in the second half of the year, he predicts that the Nikkei could well produce the strongest performance this year and may hit the 20,000 mark by 2008.

Merrill's report tips the telecoms sector in the US, and globally, as an attractive investment opportunity given current conservative valuations and "good relative earnings".

The growth of the consumer sector in emerging markets was also highlighted as creating potential investment opportunities, albeit for the risk-oriented investor willing to ride it out for the long term. "With China's 'generation Y' [ those under 27 years of age] being much more consumption-oriented than many investors realise, investors should look to opportunities in consumer finance, such as credit card operators and other lenders, as the use of consumer credit is in its infancy in many parts of [ the] emerging markets," the report states.

In relation to currencies, Miley expects that the vulnerability of the yen will become a key issue this year. "Our view is more that the yen has got the risk of being the weak currency within the G3 complex [USA, the euro zone and Japan]." He is not "overly bullish" on the dollar, but he expects sterling to strengthen significantly.

"We have had significant downside corrections on most commodity markets over the last three to six months," Miley continues. He believes that such corrections have normalised the markets, but he warns that further advances are likely to become more erratic.

The Merrill report advises investors who have opted for commodity exposure in order to achieve long-term asset diversification to hold their nerve. On the other hand, investors who took a short-term position in the hope of making quick profit should brace themselves for disappointment.

While Miley expects metals to reach significantly higher prices, on the energy side he believes oil prices have now been capped. "We won't see $70/$75 [ per barrel] again this year," he says. "We are now expecting something closer to $50/$60 a barrel for this year."

Of course, no economic or market outlook would be complete without at least a glancing reference to the threat of "geo-political shocks". To hedge against geo-political risk (and a declining dollar), Merrill recommends investing in gold or gold shares, but is careful to include the caveat "we are not 'gold bugs', and we make no claim that gold will soar to lofty heights".

So, overall, has Merrill got it right?

We'll have to wait until the tide goes out at the end of 2007 to find out for certain.