By Tom Walker, head of North America at Martin Currie Investment Management They flicker and the...
By Tom Walker, head of North America at Martin Currie Investment Management
They flicker and then fade. When will hopes of recovery in the US economy burn bright and the stock market hunker down and go?
The Philadelphia Fed's survey of business confidence has just come out and looks good. But when the ancient Greeks didn't know the answer to an important question, they asked the Delphic Oracle.
Croesus, the fabulously rich king of Lydia, was unsure whether or not to cross the river Halys and invade neighbouring Parthia. So he asked the Oracle.
'If you cross the river Halys,' came the reply, 'you will destroy a mighty empire.'
Croesus did cross the Halys and did destroy a mighty empire. Unfortunately, it was his own.
Of course, the Americans don't have Delphi. They do, however, have a president 'ready for any unforeseen event that may or may not occur.'
More importantly, they also have the evergreen Alan Greenspan, chairman of the Federal Reserve. Greenspan knows a sound economy from a ham sandwich, which coincides, happily, with a president determined to drive through a fiscal package that will put more money in Americans' pockets and revive the conspicuous consumption on which the US economy depends.
Bush's aggressive budget has set out $1.35 trillion in tax cuts over 11 years and allocates $100bn to a fiscal stimulus to be distributed this year and next. Greenspan, meanwhile, has done something most of us will never see again ' 11 cuts in US interest rates in one year.
So we are positive. Volatility has given us the opportunity to buy some new stocks. Our new holdings include Baxter International (healthcare), Air Products and Chemicals (industrial gases), Canadian National Railway and Soundview Technology Group (stockbroker).
We have also bought a holding in Compaq. Its price has collapsed since it was bid for by Hewlett Packard, despite the company's fundamental performance exceeding expectations.
Georgia Pacific (forestry products) is another new addition and we have increased our holding in General Electric, raising our exposure closer to our benchmark index weight.
We have reduced our energy exposure, cutting Exxon and Chevrontexaco, and sold our holding in Safeway.
Taken as a whole, these transactions have increased our exposure to the economic recovery we anticipate in 2002.
This year will prove rewarding for US equities. We expect to see the benefits of the restructuring of corporate America, while low interest rates should stimulate economic growth. The Fed will be reluctant to increase interest rates until economic recovery is well established.
Corporate sales are unlikely to grow quickly. But cost cutting, reduced capital investment, lower interest charges and a smaller depreciation charge will all help profit margins recover. That recovery could be swifter than the market expects. If so, that is good news for equities.
Restructuring benefits will soon feed through.
Low interest rates will stimulate growth.
No rise in rates until recovery established.
Recovery has yet to take hold.
Recession may prove to be a double dip.
Much rests on willingness to spend.
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