There are mixed forecasts for whether the US is slipping into recession but after recent shakeouts i...
There are mixed forecasts for whether the US is slipping into recession but after recent shakeouts in the markets, many investment managers see equities as good value versus bonds.
Invesco's Tony Broccardo, head of global products, says: "We have moved overweight equities versus bonds in our global balanced portfolios. We are overweight Europe, the US and emerging markets, neutral the UK, and underweight Asia and Japan."
Broccardo says that Invesco's expectations have led to fully invested portfolios, despite the falls in the world markets. For the year to 20 March, the MSCI World Index is 14%, the S&P 500 has dropped 13%, the Nasdaq is down 25%, Japan's Topix is down 7%, and the MSCI Europe has dropped 16%.
He says: "We acknowledge the short-term impact of investor sentiment but are still convinced that the economic and corporate fundamentals will prove positive in the medium term."
Tech and telecom sectors have taken the brunt of the recent negative sentiment. He says: "One of the underlying reasons for the market's weakness has been the unwinding of excess investment. Capital expenditure as a percentage of GDP in the US rose from 12% in 1991 to 20% in 2000. Information technology firms have been particularly exposed to the reversal here."
Broccardo believes the US and global economies are fundamentally healthy. He says: "The US has slowed sharply from an unsustainable growth rate of 6.1% a year in the second quarter of 2000 to 1.1% in the fourth quarter. But the latest US retail sales data is consistent with real consumption growth in the first quarter of 2001 of at least 2.5% a year. Consumption accounts for 66% of US GDP and so would require a decline of 5% in all other GDP components combined to produce negative overall growth in the first quarter."
Fiona Hathorn, head of Old Mutual Asset Management's new global equities team, says: "There is growing evidence of a gathering recession spreading rapidly from the world's two biggest economies, the US and Japan. Industrial production has been falling for months and emerging economies, particularly those in Asia, are suffering the backwash of weak demand in their key export markets.
"In the US, the gathering recession and the policy response are strong. In Japan, economic activity has been depressed for so long that rates have been set to zero, while large budget deficits continue. However, in Europe, the evidence of a downturn is only slight, so interest rates have not been cut yet."
She says global bond yields seem likely to fall because interest rates are reduced along with inflation and economic activity. Equities are suffering as earnings per share come under pressure, but present share prices imply attractive valuations relative to either bond yields or interest rates.
She says: "Those attractive valuations are the product of investors' fears and may become better if those fears intensify. But the global policy response seems likely to restore confidence over the months ahead as it revives economic activity. Timing is highly uncertain, but confidence may return first to the economies where it has been lost the quickest. Once again, the US is likely to take the lead."
Feasibility study due
'Let’s be bold enough to demand change'
Joint life second death option added to relieve tax burden on couples gifting assets
Backed by Schroders, LGIM and the IA
New system for funds without without three-year track record