The dream goes on. Americans love their numbers. Amid the plethora of benign ones, US productivity g...
The dream goes on. Americans love their numbers. Amid the plethora of benign ones, US productivity growth has just come in at 5.3% for the second quarter. Confounding the critics, second quarter GDP growth exceeded all expectations at 5.2%. We believe that the second half of 2000 will see slower economic growth and take the full year to 4%.
Inflation may be under control, but the danger still lurks. If consumers start increasing their spending by 10% in what is left of this year, the income/expenditure imbalance will widen again and Alan Greenspan will raise interest rates again.
The other great imbalance in the US economy is the private sector deficit - most visible in the trade deficit. While the price of oil has exaggerated the problem it is excess domestic demand that is the root cause.
Our base (and best) case is that domestic demand slows and that the export boom, which started in March 1999, continues thereby slowing the decline in the trade deficit. In the first half of this year, export growth was strongest to Mexico, China and Canada. By contrast, exports to Europe are up only 5%, though they are improving.
Our bets against the index are few in number and small in size.
Our feeling that, at present, narrower industry groupings and individual stocks are more important as drivers of relative performance than broad sectors.
We have been increasing our weighting in financials and will continue to do so. Citigroup and insurer AIG continue to reward our faith in them. We are overweight technology, and will top that up in recognition of the 2% increase from 31 August in that sector's weighting in the MSCI North America index.
We are also overweight energy. We expect the oil price to be firm in the short to medium term. If true, that will be good for earnings. So far, Exxon and Conoco have been justifying our position. In pharmaceuticals we find little value, and our industrials weighting is very stock specific.
After strong numbers for quarters one and two, analysts were continuing to revise more earnings up than down. It is interesting to note where this earnings growth is coming from. Excluding energy and commodities, old economy earnings growth was only 4% against 35% for the new economy. This explains our overweighting of technology.
We are entering a weak period for US equities. This is the time of year when companies have to own up if they are not going to make their full year numbers. In an environment of slowing earnings, bad news is almost never "in the price". So after a strong August, the market is vulnerable in the short term. There's a chance of buoyant consumer spending in the run-up to Christmas, which may make for a good market in quarter four.
Longer term, we believe that returns from US equities will be in line with eps growth.
Tom Walker is a director and head of the North American team at Martin Currie Investment Management
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