By ALex Ingham, head of US equities at Aberdeeen Asset Management The US market continues to be ...
By ALex Ingham, head of US equities at Aberdeeen Asset Management
The US market continues to be weighed down by the concerns over earnings quality and corporate malfeasance, the timing and strength of the earnings rebound and economic uncertainty.
The problems created by the bankruptcies of Enron and WorldCom and SEC investigations into accounting issues at AOL and Tyco have undermined investor confidence and have led to regulatory and governmental reforms as well as management upheaval. As the US economic recovery falters, so earnings estimates have been revised down for the rest of 2002.
Having turned positive in the second quarter for the first time since early 2001, US earnings are expected to rise by 11% in the third quarter, down from previous expectations of 16%.
The weakness of equity markets in recent months and the dip in certain key economic indicators globally have raised market concerns about the potential for a double dip, particularly in US activity. A rate cut in the US is also looking increasingly likely as growth remains sluggish and fragile.
The Federal Reserve is already on easing mode making such a move relatively straightforward. The negative wealth effects of the equity market declines though are being seen as offset by the strong property market in the US. However, US consumers are still being called on to carry a disproportionate share of the demand load.
Increasing the validity of the double dip argument, economic data released during much of September was generally worse than expected. Initial Jobless claims declined by less than expected to 424,000 in the week ending 14 September ' analysts had been expecting claims to be around 410,000. Industrial production was weaker than expected, declining by 0.3% in August compared with a rise of 0.2% in July -analysts had expected industrial production to rise by 0.2% so the poor data fuelled double dip speculation. Business inventories also rose by 0.4% in July and capacity utilisation was lower than expected, adding to the gloom.
On a positive note, retail sales for August came in slightly better than expected, due in part to stronger home-improvement sales. Retail Sales less Autos rose by 0.8% in August, above the expected rise of 0.5%.
However, the Federal Reserve said in its Beige Book (its regional economic report card) that the US economy had slowed in recent weeks due to sluggish factory production and little or no gains in employment.
Against this backdrop, our US funds remain underweighted in technology and telecoms. We are overweight industrials and energy as well as healthcare, which we favour for its growth characteristics and defensive qualities. We also remain overweight regional banks at the expense of the larger money centre banks.
Our portfolios have also increased weightings in large-cap companies by adding to select names such as Citicorp, AIG and Wal-Mart. We are also looking to maintain a tilt towards cyclicality in our portfolios by adding to basic materials and industrials on weakness in these stocks. In terms of the broader US market, we are expecting a new, lower equity trading range for the S&P 500 between 800 and 1,000, leaving scope for marginal gains from current levels.
We are also maintaining our weak dollar forecasts despite the recent resilience of the dollar, which we put down to the deteriorating developments in the eurozone and Japanese economies.
A US-Iraq war would also lead to dollar weakness. This would be exacerbated if the US acted alone but would be reduced sharply if any war was a multinational effort, followed by a quick war contained within Iraq.
US earnings may rise by 11% in third quarter.
Rate cut increasingly likely.
Retail sales for August better than expected.
Concerns over earnings quality.
Iraq war would lead to dollar weakness.
US economy slowed in recent weeks.
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