By Raj Hallen, investment manager pooled funds at Premier Fund Managers After stalling in Janua...
By Raj Hallen, investment manager pooled funds at Premier Fund Managers
After stalling in January and falling through much of February, global markets have staged a comeback over the past few weeks, driven primarily by news from across the Atlantic.
The slowdown in the US last year brought with it corporate disappointments and higher unemployment. However, the US recession appears not to be happening after all ' the technical definition of a recession, two consecutive quarters of economic decline, has not occurred, with GDP figures for the fourth quarter of 2001 confirming economic growth.
We have seen positive US data filtering through for much of this year but until recently, investors have been focusing on the fallout from the Enron scandal. Enronitis has affected Tyco, the US's largest conglomerate, General Electric, the world's largest firm, Computer Associates, which is being investigated for fraud and IBM, which failed to report profits.
At a macro level, it looks optimistic for the world's largest economy, with all the lead economic indicators pointing to a recovery. The latest evidence of an upturn came when US labour figures for February showed the first rise in employment since July 2001. These figures closely followed the Institute of Supply Management's report, which showed a strong pick-up in activity in the manufacturing and service sectors.
For the bulls to really come charging in, an improvement in corporate profits needs to be seen and, while many US firms met analysts' reduced earnings expectations for the fourth quarter, there was little in the way of forward forecasting for 2002. When management remains tight-lipped, it should be taken as a signal to remain cautious and we expect it to be some months before the corporate profits picture improves to the same degree as the economic view.
The world's second-largest market, Japan, represents 10.7% of the global market by capitalisation. In recent weeks the financial press has been predicting catastrophe in Japan. In the main, they are responding to the Japanese stock market recently falling to levels last seen in 1984, the threat of Moody's downgrading Japanese government debt and the much-publicised problem afflicting Japan ' the banking system.
The Japanese economy is clearly in dire straits and has contracted for the past three quarters. Prime Minister Koizumi is under pressure to put the required structural reforms in place to get the stalled economy moving. In the short term, it is likely that the people of Japan will have to endure more pain ' unemployment is already at post-war highs and will rise further as more debt-laden firms are allowed to fold.
However, the pitfalls of having no exposure to the Japanese market was demonstrated in 1999, the financial and deep-rooted economic problems still existed, but the Nikkei was the best-performing mature market index that year.
Positive economic data has already started to kick-start global markets, and will continue to drive volatile markets forward. Any hint of better corporate profitability we feel will push markets up a gear and further ahead but this may not be around the corner.
Positive US economic data.
No US technical recession.
Japan strong rebound from lows.
Corporate profitability outlook.
Japanese economy is still a concern.
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