The US is set to outperform on a global basis as the US Conference Board's Leading Indicators index ...
The US is set to outperform on a global basis as the US Conference Board's Leading Indicators index points to tangible signs of economic recovery.
Indicators first turned positive in November and were confirmed in December, and as corporate profits gradually trend upwards, a turn in the economic cycle is virtually guaranteed, according to Mike Lenhoff, chief global portfolio strategist at Gerrard.
The upturn in lead indicators is assuaging concerns over the reliability of accounting procedures in the reporting of company earnings. Lenhoff says the problem has been exemplified by the Federal Reserve recently ordering a commercial bank to restate its earnings.
Lenhoff says nearly 350 of the S&P 500 companies have now reported fourth-quarter earnings and, of these, only 17% have reported worse than expected numbers, 57% beat their targets, while the rest met their aims.
Andreas Uttermann, global chief investment officer at Merrill Lynch Investment Managers, is also confident of recovery in the US over the course of 2002 but is concerned it will be anaemic on the back of continued weak margins and high valuations.
Uttermann also points to improving liquidity as a positive fallout of increasing levels of investors confidence.
He says: 'Indicators have supported our expectations of a modest recovery in economic growth during the second half of 2002. However, we believe that risks remain and it may be some time before we can be confident of a sustained recovery.'
While the consensus outlook for the US is positive, if not overly enthusiastic, it is in contrast with the outlook for the UK and Europe, where equities are expected to continue trading sideways or post very weak growth at best.
Uttermann is neutral on the UK on the basis that the stock market is too heavily weighted in defensive stocks. Although he sees grounds for loosening fiscal policy, the dominance of banks, utilities and telecoms, the very factors that drove last year's market to outperform on a global basis will prevent anything more than limited growth.
Lenhoff adds that while large caps have been treading water, small and mid caps have underperformed on the back of fears stemming from the Enron debacle and uncertainty over US companies' stated profits figures.
Analysts have been trimming back their numbers for the UK across the board and, for the near term at least, the FTSE 100 is likely to continue trading within a range of 5,000 and 5,350.
Similar performance has been observed across Europe, Lenhoff adds, with indices trading within narrow ranges.
He says: 'Equity markets on the continent have showed little inclination to move away from recent trading bands and suggest that a further period of sideways trading is more likely.'
Uttermann agrees, seeing little evidence of any imminent strong rebound in economic activity, despite the gradual stabilisation of business and consumer confidence indicators.
Investors remain moribund on the prospects for Japan, however. Uttermann believes the Eastern economy has deteriorated further of late and remains in dire need of sweeping structural reforms.
He says: 'Our investment strategy remains unchanged, sticking to the export-related blue chip shares and companies with restructuring potential.'
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