The main concern for the future growth of the global economy has for some time been the direction of...
The main concern for the future growth of the global economy has for some time been the direction of US interest rates and the threat of a hard landing in the US.
The repercussions for global markets would be significant if growth in the US economy fails to moderate, interest rates rise significantly and the economy is tipped into recession. That said, global economies are generally buoyant and inflationary pressures are still weak, which is a favourable background for markets.
Investors are increasingly discriminating in their choice of stocks after the extreme activity of the first half of the year. We expect bond markets to continue to trade in a range around current levels. Inflation expectations are stable, supply is restricted because government finances are strong and improving, and any rises in short rates should result in a moderate flattening in yield curves. Having increased our bond weighting in July, we are now neutral on bonds.
Currently, we favour overseas stock markets to the UK. Our bottom-up approach to analysis is leading us to find better buying opportunities overseas, particularly in the US and Europe.
From an economic perspective, the UK investment environment is favourable. Slightly above trend growth, low inflation and interest rates near their peak augur for a buoyant stock market. However, the market is lacking any strong themes and we are finding few compelling buying ideas.
All eyes are currently on the US, with investors looking for signs of the much sought after soft landing. Recent data suggests that this is closer to becoming reality, which would provide a boost to global markets. As the economy slows, reliable earnings growth is harder to find outside some of the booming technology sectors.
However, second quarter results from tech companies have been mixed. Companies providing infrastructure for e-commerce have performed strongest, while mainframe and PCs have lagged behind. We are sticking to our overweight position.
The economic news from Europe continues to be positive, although some signs of a slowdown are emerging. The euro has suffered a bout of weakness despite short term interest rates being edged up. We remain unenthusiastic about most old economy stocks, and have doubts about the profits growth of some of our favoured stocks in the tech and telecoms sectors.
Newsflow from Japan is full of contradictions but data on the economy has been generally positive. However, consumption remains weak. In contrast to the apparent health of the economy, the market has performed poorly in 2000. Overall, global economic news is brighter than the performance of markets may suggest. Our focus continues to be on finding exciting growth stocks with reasonable valuations.
John Carson is a director in the institutional clients department at Baillie Gifford
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