peter lucas plans to swap global bonds for equities as a stock market bottom will emerge by the end of this year
Ashburton Investment Managers says equity markets will bottom during the last quarter of 2002, leading it to take a very cautious views on global bond markets.
Peter Lucas, director and global investment strategist at Ashburton, said: 'We have been patiently awaiting a low-risk entry point to increase our exposure to equities. It now appears to be imminent.'
While half of Ashburton's equity underweighting is currently made up of Asia Pacific equities, however, Lucas said that European equity markets are now extremely cheap.
Ashburton's bonds strategy currently involves significant cash weightings as a US economic recovery in 2003 will generate a shock in bond markets, Lucas said.
Lucas said the headwinds of corporates clearing debt, knocks to consumer confidence and the rising oil price have all hindered the US economy's ability to bounce back. These headwinds, he said, will turn into tailwinds leading to an improvement in the US economy in 2003. 'Financial markets always tend to move three to six months ahead of the real economy and could therefore register a low at any time. European equity markets are extremely cheap and will remain as such until Wall Street turns, but should then recover rapidly.'
Ashburton believes the European equity markets need not remain dependent on the direction of the US markets. A lack of liberalisation policies from European policy makers, however, means they have failed, like those in Japan, to put themselves into a role of leadership.
'Despite all its problems, America remains the main engine of growth in the global economy. Europe could do more but chooses not to. Japan may be starting to do more, but it is early days yet,' he said.
This, he added, has profound implications for global equity markets. 'First, they are unlikely to recover until Wall Street reaches a bottom. Secondly, if the likes of Europe and Japan fail to assume some sort of economic leadership, the long term outlook for equities will remain bleak.'
Focusing on the prospects for the US, Lucas said: 'There is some reason for optimism on the US economy. As the economy has slowed so retailers and manufacturers have scaled back their inventories in anticipation of leaner times ahead. This has also helped them in their drive to reduce costs and shore up profits. Encouragingly, the inventory to sales ratio has now fallen to a record low and it is likely that this process will start to go into reverse, thereby providing and extra source of demand in the economy.'
Another positive sign comes from the effects of stabilising equity markets on the wealth effect in the US. Lucas said: 'Provided markets do not fall substantially from where they are now, we should start to witness some improvement in consumer confidence.'
Effectively, investors have been returned to where they were two years ago, he said. Added to this potential underpinning to the US economy, Ashburton is forecasting a benign end to the Middle Eastern crisis. 'Our inclination is to believe that there will be a benign outcome, the oil price will fall and equity markets will recover,' he added.
Despite improved risk appetite
FOS award limit increase
Relates to 136 million transaction reports
Ceremony will take place 13 November