The US manufacturing sector is now showing signs of recovery. Production is picking up to rebuild in...
The US manufacturing sector is now showing signs of recovery. Production is picking up to rebuild inventories, which were run down last year. However, following the IT boom, many companies overinvested in production capacity and have more than enough to meet any immediate growth in demand, says Rupert Carnegie, head of research and strategy at Henderson Global Investors
'They also have very high levels of debt and this will inhibit one of the major drivers of economic growth, new capital investment,' he adds. 'It will also slow growth in employment. Consumer spending has remained at relatively high levels, with car and house sales remaining strong. This cushioned the impact of the recession, but will limit the economy's potential to rebound.'
Among the world's major economies, Japan is experiencing the deepest recession, according to Carnegie. Industrial output fell by 14% in the first nine months of last year and service output also fell for much of the second half. 'As a result,' he says, 'total economic activity fell by almost 4% between the first and third quarters and it looks set to fall further in the next few quarters.'
Giles Keating, chief economist at Credit Suisse First Boston, agrees that Japan is falling deeper into recession, with consumer and private capital spending continuing to fall. However, on the positive side, Keating expects the contribution from net exports to be positive, as yen weakness this year has improved competitiveness.
Germany is another major economy now in recession, with survey data suggesting it will not improve in this quarter but could begin growing again by the second quarter of 2002. French GDP increased by 0.5% in the third quarter of 2001, which should avoid a recession, Keating says
Looking at the rest of this year, Carnegie says the US will lead the way but investment spending will remain a drag and he predicts GDP growth will only return to trend by the end of the year.
'Further interest rate cuts are possible in the US and Europe,' he adds. 'The ECB, in particular, has plenty of room to cut rates as inflation falls below its 2% target and growth remains below trend. Interest rates will be held at very low levels until economic recoveries look assured. Modest monetary tightening may occur late in 2002.'
While he believes equities will outperform bonds and cash during 2002, Carnegie feels that soggy growth will inhibit an earnings recovery and equity returns will be relatively modest at 10-15%.
Government bond valuations globally are modestly expensive and the global recovery will also pressure bond prices. Corporate bonds, however, should perform relatively well, as the outlook for individual firms improves with the economy.
Of the major equity markets, Henderson Global Investors favours the UK and Europe over the US as they offer better value.
'Within equities, our preferred theme is currently cyclical growth, that is, companies that achieve above average growth in a recovery,' he says. 'But the understated nature of the recovery means that profit growth will turnout to be patchy and investors have to become more discerning regarding the stocks they pick.'
US manufacturing sector beginning to recover.
Further interest rate cuts possible.
Consumer spending has remained robust.
Government bonds look expensive.
Overcapacity still dogging many sectors.
Japan struggling against recession.
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