US fund manager christopher lees says world economy will be dominated by bush's tactics
The world economy is to be dominated for the next five years by the re-election strategy of US President Bush.
That is the view of Barings US fund manager Christopher Lees, who told delegates at Investment Week's Markets Forum this month that George W Bush is unlikely to make the mistakes that cost his own father re-election.
Lees said the current president is likely to follow the example of Ronald Reagan, whose tax cuts and aggressive foreign policy proved popular with the voters, rather than that of his father who presided over a weak economy.
In the aftermath of the technology bubble and stock market crash, Lees argued there is plenty of evidence the US can recover and is not going to be the next Japan.
He said: 'The policy makers are doing everything they can to avoid the Japan issue. Do not underestimate how deep down in the DNA of Americans the memory of the 1930s lies .'
Furthermore, Barings sees the bubble in the US as totally different to that of Japan. Lees said the latter was in property, an unproductive asset, while the former was in productive assets that are still being used, making it similar to the car, PC or railway bubbles of the past.
He pointed out that unlike events in Japan, the US bubble was financed by the capital markets rather than the banks, and low interest rates help financial institutions to restructure and survive.
Barings is factoring in nominal GDP growth, combining inflation and real growth, of 6%-8% per year in the immediate future. Comparing the earnings growth in the S&P500 index to nominal GDP growth during the 1947-2002, period, Lees said 6%-8% GDP growth produced average earnings growth in the S&P of around 10% while anything greater than 8% produced earnings growth of around 17%.
Conversely, GDP growth of 4%-6% produced S&P profits growth of 2.5% while growth of less than 4% produced no earnings growth in the index at all.
'You can see from this why US policymakers are so set against deflation,' Lees said.
Turning to valuations on stocks, Lees highlighted the huge compression in P/E ratios of the 50 largest S&P 500 companies in the past three years. In March 2000, P/Es in this peer group ranged between 10 and 120 times but by March 2003 the range was between 10 and 30 times.
Lees said: 'People will want to be in the few genuine growth stocks in the world and many of them are in the US.' Now that the new economy bubble has collapsed, Lees said the few well-run businesses within the sector are coming to the fore. He noted that Amazon has been outperforming Wal-Mart since December 2001.
'The market has changed its view of some of the internet stocks as they have real cash- flow and real earnings,' he added.
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