Environment favours riskier asset classes

In an environment of increasing global liquidity and economic recovery corporate bonds offer better risk adjusted returns than equities.

Kermit Schoenholz, chief economist at SalomonSmithBarney (SSB), said he believes that, considering the historically wide spreads, corporates currently offer a better prospect than equities.

For the coming year, Schoenholz predicts a strong recovery in the US and Europe, as a result of the proactive policy responses taken most notably by the US government and to a lesser extent, the European governments.

In the absence of a major shock, the policy stimulus already taken is likely to overcome recessionary forces, first in the US and then in Europe, he said.

He contrasts this, with the poor prospects for recovery in Japan, which he suggests will ensure that the global recovery will be not be as sharp as the recovery seen in the early 1980s when all major industrial economies participated in the upturn.

He warned that there are a number of substantial risks to his forecast. Another abrupt terrorist attack, a supply shock or a systemic financial disruption could have a similar impact on world financial markets as 11 September.

'No investor can rule out new terrorist events,' Schoenholz said. 'By itself the routine media discussion of potential biological, chemical and nuclear threats boosts investor uncertainty.

'Supply shocks pose the greatest threat to the global outlook because they likely would prolong the global downturn. The most obvious case would be an oil price surge, possibly as a result of instability in the Middle East.

'In the short-term our regional bias remains skewed towards the US, and we recommend near-benchmark exposure for both Europe and Japan. As prospects for cyclical recovery improve in 2002, the attraction of emerging markets should rise.'

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