By Chris Rice, head of European equities at HSBC Asset Management The US economy remains the key ...
By Chris Rice, head of European equities at HSBC Asset Management
The US economy remains the key driver of global growth and the effect of massive monetary and fiscal loosening should enable the US economy to come out of recession somewhere around the second quarter of 2002. Any recovery in Euroland will probably be less pronounced than that in the US, as interest rate cuts have been less aggressive and the room for fiscal expansion is less as a result of the Maastricht deficit criteria.
However, with the exception of Germany, there is unlikely to be a technical recession in Europe and the data for the fourth quarter 2001 should be the weakest that we see from the region. The principal unknown factor in the first quarter of next year is the changeover to euro notes and coins. However, this is undoubtedly a springboard for further reform in the EU, as price transparency will increase.
Leaving the economics behind, we can start to look at the market and how portfolios can position themselves in 2002. Possibly the greatest single factor in assessing any given fund and whether it has outperformed over the last two years is whether or not the fund was overweight in value stocks. Any manager who was is likely to have outperformed. Any manager who prefers growth stocks would have had to get stockpicking absolutely spot on to beat the index.
Thus it is little surprise that the extreme outperformance of growth stocks up until March 2000 was savagely unwound until the market arrived at the other extreme. However, we do not expect this trend to suddenly return to its historic band and for the first half of 2002 at least, the principal sector decision is when to overweight cyclicals at the expense of defensives.
Historically, when signs of recovery become apparent, cyclicals will outperform the market materially, with much of the outperformance in the initial surge. So is the stage set for European cyclicals to repeat this trend?
The key sign that we will be looking at is the monthly US NAPM. It may seem strange to watch a US survey for signs of a European recovery, but there is a direct historical link. A trough was quite clearly forming in the US data up to the terrorist attacks in September, and although these understandably knocked confidence, it now appears that the US has formed a double bottom that we should see replicated in Europe by mid-2002. We believe 2002 will provide a number of challenges for active managers. While stock selection is always important, as expectations change, funds must be positioned in the right areas if they are to outperform both the market and peer group. At HSBC we describe this as business cycle investing ' looking at the areas of the market that will benefit from prevailing conditions and positioning funds accordingly.
With the high levels of volatility, the last year was one for either defensives or special situations type funds. With 2002 showing signs of a co-ordinated global recovery, sector and style positioning will prove just as important as stock selection when these inflection points arrive. With a large proportion of the market in economically sensitive areas, Europe should outperform many global equity markets this year.
Unlikely to be technical recession in Europe.
Economically sensitive stocks to outperform.
Euroland recovery less pronounced than in US.
Unlikely nature of euro changeover.
High levels of volatility in evidence.
Germany is now in recession.
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