By Jim Stride, managing director at AXA Investment Managers The past year has been challenging i...
By Jim Stride, managing director at AXA Investment Managers
The past year has been challenging in investment markets. These have not only been a function of share price behaviour but also of wider accounting and governance issues emerging from the US corporate scandals.
In the UK, several investment publications dominated the financial services industry, such as the Pickering Review, Sandler Report, Higgs Review and Consultation Paper 121.
Geopolitical concerns about a possible war in Iraq and the terror attacks in Bali and Mombasa have, however, overshadowed all of these market and industry developments.
What will 2003 be like? At a macroeconomic level, we are anticipating a period of low economic growth, without recession. Deflation remains the leading risk. However, the Fed is fully aware of the dangers and has recently cut interest rates to 1.25%.
Against this economic background, the level of consumer spending and the willingness of governments to loosen fiscal and monetary policy are critical. Inflation is expected to remain subdued, as long as no prolonged spike in oil prices occurs.
The European economic engine is also stuttering. Generally, Euroland economic activity is likely to remain below trend next year, particularly in Germany, where the fiscal stance is tightening.
Indeed, the policy mix of Euroland is restrictive, despite the European Central Bank's recent 50-basis-point cut in interest rates and the Commission's decision to delay fiscal balance until 2006.
The dominant Euroland economies are Germany and France. In Germany, the SchrÃder Government's plans for fiscal tightening seem set to act as a disincentive to corporate investment. Additionally, higher social security contributions and tax increases will have an adverse effect on consumption.
Once again, the Asian economies have generally performed well but growth momentum has probably peaked. Indeed, Asian exports have slowed down, particularly those to the USA, and domestic consumption has cooled. China continues to display robust economic growth, owing to export strength and domestic investment.
In Japan, export growth has faltered but consumption has been surprisingly robust. The real risk in Japan lies with continued weakness in the banking system and deflation.
The UK will likely experience modest economic growth in 2003. The Chancellor's pre-Budget report revealed a hit to public finances arising from lower tax receipts, in the wake of reduced activity and the increase in public sector spending. Thus, we confidently predict an increased supply of gilts in 2003. In consequence, bond prices will probably edge lower.
On balance, 2003 will be another challenging year. The markets will continue to fluctuate and plenty of excitement can be expected.
In terms of the UK equity market, we are likely to witness a large number of takeovers, mergers and rights issues.
Well-diversified portfolios will be essential, particularly until the geopolitical uncertainty surrounding Iraq is resolved.
Inflation is expected to remain subdued.
Takeover activity expected.
Increased gilt supply in 2003.
Geopolitical concerns still prevail.
Deflation remains the leading risk.
2003 to be another challenging year.
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