There is anticipation of a better global outlook for the rest of 2001 with loosening monetary polici...
There is anticipation of a better global outlook for the rest of 2001 with loosening monetary policies and a decline in oil prices since last year.
In the short term, market conditions remain difficult and the expectation of sluggish economic growth still prevails.
While the US economy has experienced a steeper downturn in growth than anticipated, recent signs of recovery mean the risk of a recession is greatly reduced.
There are hopes the US economy will pick up during the second half of the year. The falls in interest rates and slight increase in employment in the industrial sector suggest a revival of economic activity.
Head of global fixed interest at Edinburgh Fund Managers, Michael Turner, says the loosening of monetary policy in the US is being complemented by fiscal policy.
He says: 'There is talk of a tax rebate that will be announced in the forthcoming budget. Thinking is that this would have an impact on the economy by raising the real income of consumers and improving sentiment throughout the region.'
With the newly elected prime minister of Japan, Junichiro Koizumi, the country is addressing some of its economic problems and government has put forward reforms to boost the economy. But while restructuring is under way, future prospects remain uncertain for the Japanese economy, according to investment director of GAM Venkat Chidambaram.
He says: 'The Japanese economy is projected to experience 0% to negative growth during the global economic slowdown. In terms of the corporate restructuring, we think there will be a lot of pain before we can see the gain.'
Chidambaram also thinks that until stability is restored in the US market, Asia remains a zone of high exposure. The Asian markets are dependent on exports to US markets and on electronic products, both of which are currently facing uncertainties.
Investment manager at Ashburton, Frances Wilson, says that the health or otherwise of the US economy is currently the dominant factor in financial market performance. 'For some time now, we have believed that the US economy is far more robust than analysts suppose and the recent release of the first quarter GDP figure of an annualised rate of 2% certainly repays our faith,' he says. 'Even if this figure is revised downwards, it now seems highly unlikely that America will see recession in 2001.'
Over the past few months, with equities dropping rapidly and the US money supply expanding at a double-digit rate, Wilson says a large body of liquidity has built up outside the markets.
'With the short-term economic outlook now less uncertain thanks to rapid central bank interest rate cuts,' he says, 'it seems likely that this wall of money will move into the real economy, witness continuing property price inflation in the US and UK, and equities rather than fixed income instruments. In addition, any improvement in the global economy should feed through into corporate profits, further enhancing the appeal of equities.'
l General decline in oil prices.
l Revival of economic activity in US.
l Excess liquidity should go to equities.
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