Globally the economy is starting to show signs of improving following US rate cuts. Dimitris Melas...
Globally the economy is starting to show signs of improving following US rate cuts.
Dimitris Melas, global head of research for HSBC, says: "In the US there has been significant slow down in the economic growth and the Fed has been prompted to cut interest rates."
Valuations are coming back to reasonable levels. Greenspan has shown strong signals that he will continue to ease monetary policy, and many analysts expect interest rates to be reduced by 150 basis points throughout the year.
Melas says the next big corporate earnings announcements could bring bad news, but he expects there to be some good corporate earnings results in the next half. With the economy slowing down Melas believes there is a 60% probability a recession will be avoided.
Peter Lucas, global investment strategist at Ashburton, says: "The rate cut has removed doubts that falling profits will continue and we expect there to be an improvement."
In addition, Lucas says oil prices have fallen, which should be good news for companies.
There has been stronger economic growth in Europe as it is somewhat protected from the US and is at a different stage in the economic cycle. Although the recovery of the euro is eventually likely to have a negative impact, healthy earnings growth in 2001 is still expected.
Lucas says: "In Europe, inflation is not a problem and interest rates are stable, which is all good news for growth." He adds that Europe is benefiting from restructuring effects of having a single currency.
HSBC is slightly overweight in Europe compared to the UK as there is better earnings growth potential in Europe.
Melas adds: "In this environment we do not think there is a compelling reason for sector positioning but rather for stock picking."
In Asia, HSBC believes Hong Kong is likely to hold up well as it is associated with China, which has strong economic growth. But Melas believes care is needed in Korea and Taiwan as these countries are heavy exporters to the US and could be affected by a slowdown there.
Lucas says the smaller stock markets in the Philippines and Thailand are starting to break higher after long periods of poor performance. He says investors have held back from these areas because of the volatility of the Nasdaq, but as the Nasdaq is starting to steady, investors are willing to take more risks.
SalomonSmithBarney's chief economist Kermit Schoenholtz says the US slowdown is the first inventory correction of the new economy variety, and is likely to be characterised by a rapid adjustment of both economic activity and policy.
He says: "Tight financial conditions and high energy prices have slowed final demand growth sharply from about 5% in the first half of 2000 to less then 1% now, far below the economy's sustainable growth pace of about 4%. Aggressive Fed easing is aimed at countering needlessly restrictive financial conditions and promoting an early return to trend economic growth."
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