The global economy is growing strongly and steadily, led by the US, which despite some weaker data r...
The global economy is growing strongly and steadily, led by the US, which despite some weaker data recently, continues to grow above trend. In the major economies, inflation is under control and interest rates are unlikely to rise to the levels of previous recessions. Overall, global economic conditions suggest that the investment environment is benign.
In contrast to the stable economic outlook, stock markets have been extremely volatile in the first half of the year, driven by the theme of the internet explosion.
Despite the risks of equity investment, we believe that, over the longer-term, equities will outperform bonds. However, we believe bonds now offer better value than they have for some time.
In the equity markets, we prefer overseas stocks to the UK. This is not a function of our economic outlook, but rather our view of individual stocks within each region. In addition, we generally favour new economy stocks.
The UK economy is reassuringly dull, with economic growth above trend but slowing, and low inflation. Interest rates are approaching their peak and the economic outlook appears to be encouraging for investors. However, we are less enthused about the bottom-up attractions of the UK market as it is polarised with cheap but unattractive stocks and high growth companies with extravagant ratings.
Following the recent 0.5% interest rate rise, US data is increasingly pointing to an economic slowdown.
The consensus is predicting a soft landing and we believe that further rate rises before the election would be surprising. That said, we are cautious of discounting a rebound in growth in the second half of 2000. Despite top-down uncertainties, the US market is laden with world class companies. In particular, there are numerous technology companies which are fundamentally sound and are no dearer than similar companies in other markets. Therefore, we are overweight the US.
Eurozone economies are now growing strongly. Despite recent interest rate hikes, the signs of growth moderating in the region are only tentative and unemployment continues to fall steadily. Overall, we remain confident in our favoured stocks and are overweight Europe.
The Japanese economy is regaining strength. Restructuring remains an important theme with new bankruptcy and corporate partition laws and new accounting standards being important pieces of legislation and regulation. However, a lack of exciting buying opportunities means we are underweight Japan.
Our regional weightings are being shaped by the dearth of interesting companies in the UK and Japan, and the greater choice of exciting stocks in the US and Europe. Nevertheless, we continue to look for reasonable stocks for our portfolios.
Ross Hunter, a Manager in the Intitutional Clients Department at Baillie Gifford
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