economic conditions in us no longer deteriorating, believes picteT
While US consumer confidence fell to a nine-year low in October the global economy is unlikely to slip into recession, according to Pictet Asset Management.
Mike Collins, head of asset allocation at Pictet, said: 'What happens over the next couple of months could determine whether the global economy sinks or swims in the first half of 2003. The recovery that began earlier in the year has clearly faded and the most recent economic data has been a bewildering mix of good news and bad.'
Competing economic forces are struggling for the upper hand, he said, which will effectively decide whether there is a global recovery.
'Conflicting forces are at work in the global economy,' Collins said.
'Balance sheet restructuring is exerting a downward pressure on demand. At the same time, a move to more accommodative fiscal policy and a sharp drop in the yield curve will support activity. The powers of reflation seem most likely to win this particular battle.'
Collins said US economic data for October was worse than expected, although he is not cautioning investors to remain out of equities.
'US production is contracting, demand growth is lower, business investment and employment growth are flat and money supply growth is slowing,' said Collins.
'But there is good news too. The housing market remains exceptionally strong. New home sales have soared and housing construction growth is at recent highs.
'Although business investment remains flat, it has stopped deteriorating. A turn in the US investment cycle may not be far off.'
Despite this backdrop, corporate profits are improving in the US and productivity is rising relative to labour costs for the first time since the early 1990s.
'Capital spending tends to be a drag on profit growth so the return to profitability is a good sign for investment,' Collins said.
Although consumer confidence is low, Collins does not believe this will necessarily translate into a drop in spending.
'Falling confidence does not always translate into curbing of spending,' he said. 'During the 1997-98 financial crisis and post-11 September, consumer spending continued to grow despite lower confidence. The Fed's 50 basis point rate cut and the recent equity surge should keep consumers spending.'
The picture in the eurozone is less healthy as the European central bank continues to build on its reputation for inaction.
'Eurozone growth continues to slow,' said Collins. 'If monetary policy remains this tight for much longer, there is considerable risk the eurozone economy will slip into recession.
'What's more, growth and inflation differentials between Germany and the smaller eurozone economies continue to increase. There seems little hope for Europe's leading economy until labour costs move closer to the European average.
'But there is a glimmer of hope for Europe, at last. The outlook for the markets in the region is brighter thanks to lower share prices, meaning improved valuations, and signs of a pick-up in money supply growth, he said.
'Although, on a historical basis, equity valuations appear a little high, the markets look more reasonably valued than for some time and a revival in earnings seems likely over the next six months. Equities are relatively attractive compared to bonds, where bond yields have fallen sharply and are discounting weak growth.
'If the more optimistic scenario does pan out, bonds are currently looking overvalued. But current equity valuations are only attractive if, and it is a big if, correlations with bonds normalise. This should happen if earnings do revive.'
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