The prospect of synchronised world growth in 2000 will put more upward pressure on interest rates. ...
The prospect of synchronised world growth in 2000 will put more upward pressure on interest rates.
In the US, while inflationary pressures remain subdued, the pace of growth is well above the expected long-term sustainable rate, even after making an allowance for improved productivity, and the fact that unemployment levels are very low. Fears of further interest rate rises have surfaced following hawkish comments by Federal Reserve chairman, Alan Greenspan.
Although economic growth has picked up in the UK the overall rate is not strong enough to give rise to significant concerns over inflation. Different sectors of the economy are experiencing contrasting fortunes. Financial assets, property and related sectors have benefited over the course of 1999, but others such as manufacturing and retailing have found trading very difficult. Economic growth in Europe is responding to the weakness of the euro although the currency is also impacting raw material prices with wholesale price inflation showing significant increases year on year.
The surprise fall in Japanese GDP in the third quarter was largely offset by an upward revision to second quarter growth. Corporate profitability and consumer confidence has also shown signs of improvement.
Worldwide there has been increasing divergence within markets. Technology-related stocks have been strong, while many other sectors are hitting lows. Furthermore, an increased volatility on a stock-by-stock basis highlights the importance of choosing the right stocks as well as the right sectors.
The recent performance of oil stocks and resource companies has not reflected the underlying strength of commodity prices.
Although rising oil prices should dampen activity, it is difficult to see why global growth should slow significantly without further interest rate rises. However, yield curves in bond markets are only discounting modest increases in short term interest rates over the next 12 months. A factor which could lead to weaker consumption in the US would be a sharp fall in equity prices and, given the direction of retail funds towards technology, the Nasdaq may be more influential on sentiment than the S&P 500. In the UK, house prices are a much more significant factor affecting personal wealth and consumption than the level of the equity market. Some action is expected from the Chancellor in the forthcoming Budget, but a further increase in stamp duty is unlikely to make much difference to the market.
Bond markets have recently been trading in a narrow range in the UK, US and Europe. Against international markets, UK yields are low, reflecting the shortage of supply and, with long-dated yields below 4.5%, it is difficult to see the gilt market producing an attractive return over the next 12 months. Better value is apparent in the US but a sharp slowdown will be needed for bond returns to be favourable
Michael Deakin is director of investments at Clerical Medical
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