The US economy slowed dramatically in the fourth quarter of 2000 and figures released since indica...
The US economy slowed dramatically in the fourth quarter of 2000 and figures released since indicate the weakness has continued into 2001. Despite the interest rate cuts by the Federal Reserve markets have fallen back because of renewed concerns over the impact of the slowdown on corporate earnings.
While there are still profit warnings to be found, particularly in the US, the combined influences of monetary and fiscal easing in the major economies will ultimately be positive for equity markets. The Fed in particular appears prepared to do whatever is necessary to prevent the US economy from going into a downward spiral.
The risks for the US economy remain on the downside and, in the short term, disappointing corporate profits could cap or depress the market for another couple of months.
However the additional stimulus that should result will ultimately be a major positive for equity valuations and it would seem prudent to increase exposure into any weakness as these short-term concerns are discounted by the market.
The US slowdown has yet to have a major impact on the UK and European economies. Growth in the UK has slowed a little, but for the most part, the economy remains robust. Retail sales are up 4.4% year on year, manufacturing output has been expanding steadily, and consumer and business surveys show high confidence levels.
2001 growth estimates for Euroland of 2.8% are above trend and are likely to be downgraded further as the impact of the US slowdown becomes clearer. However, the domestic stimulatory effect of tax cuts will provide support.
Inflationary concerns are receding now the oil price has fallen back and the euro has bounced. Interest rates have remained unchanged, but there remains the risk that the Central Bank will buy some credibility by retaining a tighter policy than necessary. Given Europe's relative earnings and economic strength, it should have a reasonable year and it is not unreasonable to expect an 11% return.
The picture in Japan looks a little darker. The economy has weakened significantly, and may go into recession once more. Meanwhile, the pace of reform has slowed, and there is increased political uncertainty.
The rest of the Pacific region has rebounded strongly since the year-end, supported by cuts in US interest rates. Although the real economy is set to slow from the growth rates of 2000, monetary conditions should help equity markets.
Domestic inflation is low and Asian governments will cut interest rates and boost money supply as far as possible to bolster demand. Under these conditions, it is likely that investors will switch attention back to interest rate sensitive sectors.
David Hughson is deputy chief executive at Royal London Asset Management
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