By Chris Tracey, investment director Global equities produced a negative return for the secon...
By Chris Tracey, investment director
Global equities produced a negative return for the second successive calendar year in 2001. Of course, 2001 could have been a lot worse for investors if it wasn't for the strong rally on global stock markets from their September lows. The outlook for 2002 depends almost entirely on a recovery in the global economy, which in turn depends heavily on a recovery in the US.
There are many reasons to be optimistic that a recovery will indeed take place, including the huge fall in G7 interest rates over the last twelve months, the massive fiscal stimulus already passed, which is equivalent to some 0.9% of G7 GDP, and the estimated fall in inventories in the fourth quarter.
In addition, the latest economic statistics from the US (consumer confidence, durable goods orders, sales of new homes etc) all suggest that the economy is in the process of bottoming out. Indeed, equities generally, but particularly those most sensitive to the economy, are also telling us that the economic slowdown is past its worst. One could also argue that government bonds now give the same upbeat economic message. The maverick asset class, which steadfastly refuses to believe in a recovery, is corporate bonds, where valuations do not indicate that the ratio of credit downgrades to upgrades is going to swing in favour of the latter anytime soon.
We have no argument against a US economic recovery taking place at some stage within the next few months. However, we are uncertain as to how vigorous the recovery is likely to be given that the US consumer remains over borrowed and under saved by historic standards. Private capital investment, having boomed in the latter 1990's, is unlikely to ride quickly to the rescue, which suggests that the degree of corporate earnings recovery discounted in a prospective P/E for the major Western equity markets in the low 20's may be over optimistic. Therefore, any further re-rating of equities is unlikely to come from corporate earnings surprising on the upside. But the good news is that there is likely to be very little inflationary threat in the near term so that no interest rate hikes are expected for as far as the eye can see.
Our present thoughts on investment policy are more concerned about taking profits in the more cyclical areas (including technology) where valuations appear to be well up with events. A possible beneficiary on a tactical basis might well be government bonds, where the sharp back up in yields, in our view, is overdone. Also, Pacific ex Japan equities offer good opportunities, thanks to the fact that valuations are much more attractive than Western cyclicals. Meanwhile, we find the very high real yields available on the less-than-prime corporate bonds very attractive. We remain overweight in continental European and UK equities, but are ready to take profits from the latter position as a source to fund a more aggressive investment policy at some future stage.
Partner Insight: For Blackfinch, the arrival of its IHT portfolio services was a 'natural evolution' in the group's offering and points to an established track record of returning cash to investors.
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