At the end of the third quarter in 2000 we moved overweight to equities against bonds. Profit growth...
At the end of the third quarter in 2000 we moved overweight to equities against bonds. Profit growth, although slowing, remained positive and central bank tightening appeared to be reaching its peak. Needless to say our bullish position has been suffering but we remain positive as the fundamentals remain sound. Economies continue to slow and central banks have stopped raising interest rates.
Economic growth should continue to slow in 2001, led primarily by industrial and manufacturing output, which will be hampered by slowing global growth.
Against this background, we believe there is scope for the Bank of England's Monetary Policy Committee to cut interest rates by 0.25% mid-2001. However, a further increase in public spending by the Government ahead of a general election in May could prevent such a cut.
We expect the Federal Reserve to ease rates towards 5% to avoid a damaging recession and achieve a soft landing. Although equities indicate that strong performance against a weakening environment will be difficult, high growth and more highly valued companies should respond positively when interest rates move down.
Eurozone growth slowed in the second half of 2000 as the oil shock reduced consumer spending power and inflation started to rise. Business sentiment has been falling since June in response to domestic and foreign demand coming off and rising involuntary inventories. The euro hit a series of record lows in October prompting repeated intervention by the European Central Bank.
The Japanese economy remains frustratingly mixed. The corporate sector has been strong yet consumer spending is subdued. Ongoing deflation makes structural reform even more pressing at a time when the government is deeply divided. The market has already discounted a slowdown in profit and economic growth rates but is unlikely to move significantly ahead until stronger domestic demand is witnessed.
Growth moderated in Asian economies during the fourth quarter. Profit warnings in the high-tech sector and recent indications that the US economy is slowing point to a further decline in Asian export growth in 2001.
Focus in 2001 is on the speed of the slowdown in the major economies and the likely impact that will have on the Asian economies. Barring a hard landing of the global economy, Asian economies in general should weather the global slowdown. GDP growth is likely to decline towards a 5% pace against 7.5% in 2000. Inflation remains low and should remain subdued in light of slowing economic activity. Central bank policy, unless hindered by weakness of the local currency, along with fiscal policy will be geared towards supporting growth.
Jonathan Arthur is fund manager of the Deutsche Managed Portfolio Fund
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