andrew milligan says mixture of higher inventory levels, stronger high street sales and a lack of deflation will stop double-dip recession
Standard Life Investments is confident the world economy will not undergo a double-dip recession.
Andrew Milligan, head of global strategy at the group, told Investment Week's Markets Forum in Edinburgh low interest rates mean stronger high street sales.
He added: 'Companies are controlling their inventory levels. These were slashed in 2001, which is why we had a recession. 2002 was a year of growth and it is continuing to come through.'
The group is also confident deflation is highly unlikely. Milligan said: 'Japan was inflexible in terms of politics, banking and restructuring, which is why it has suffered deflation. Europe may be tardy on this front, particularly Germany with its weak economy and low inflation, but the authorities there are beginning to realise the dangers. The US and UK are being pro-active and flexible.'
Even if rates cannot fall much further in a bid to avoid deflation, Standard Life Investments believes central banks have plenty of inflationary measures left to play with.
Milligan suggested among the policies available to the authorities are changes to fiscal policy to keep the consumer spending and corporate activity afloat and an increase in government bond issuance.
'There is also monetary expansion,' said Milligan. 'For instance, what if the Bank of England were to increase money supply by 10% a year? Inflation does create problems but central banks can counteract these.'
The markets face geopolitical risks from Iraq, North Korea and terrorism at present, Milligan noted. It is impossible to predict exactly what would happen in these three situations but the key issue remains the level of oil prices, he said.
'At the end of the day the one simple fact is the oil price,' Milligan added.'If the price is in the low $20s, that is great for the world economy. In the low $30s, it is a bit of a squeeze and in the low $40s, it is a problem. The oil price is going to be vital in 2003-2004 for where the world market goes.'
On the whole, Standard Life Investments believes bad news is now priced into the market, considering the falls in equities since 2000.
The catalysts for a possible bull market are going to be corporate, according to Milligan. He said: 'Balance sheets are slowly improving, cashflow is positive but pricing power is not great.'
Standard Life Investments' view for 2003 is to be overweight in select areas of the equity market, in particular Pacific exporters, and to favour US and UK over Germany and Japan.
Within fixed interest, the group prefers corporates to gilts but Milligan said it is unlikely to go too far down the credit curve.
'If you believe in low growth and low inflation, I would encourage you to buy some equities, bonds and property,' said Milligan. 'If you believe in deflation, don't buy corporate bonds. You need to buy high dividend stocks such as utilities and land and you need to buy gilts.'
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