While the recent rally that has seen global equity markets rise since March 2003 may have slowed sli...
While the recent rally that has seen global equity markets rise since March 2003 may have slowed slightly as investors look for more evidence of a recovering economy, the earnings season has been better than expected.
Melanie Jenner, a US fund manager at Legal & General, believes earnings in the second half of the year could rise even further. 'All sectors have come in above expectations, with 30% of the upside coming from financials,' she says. 'However, second-half estimates are quite aggressive and profits will need to come in strong or the market could sell off.'
Even so, Jenner is expecting greater confidence in the second half of the year. 'The market could gradually move higher while the economy seems to be showing some signs of improvement,' she says.
Sarah Arkle, chief investment officer at Threadneedle Investments, also believes recent weeks have shown more encouraging US economic data from retail sales, durable goods and a few manufacturing surveys.
Manufacturing, which accounts for a seventh of the US economy, expanded for the first time in five months in July, according to an Institute for Supply Management survey.
This improvement was down to an increase in orders, with US durable goods orders rising for the second month in a row in July led by bookings for autos, aircraft and computers.
With inventories lean, factory production had to rise for a third straight month in July in order to meet increasing demand. Automakers were the biggest contributor, with a 2.9% increase, while computer makers improved production by 1.3% in July.
'Looking ahead, we expect to see a healthy increase in consumer spending from a strong fiscal boost on the back of tax rebates and a stimulative monetary policy,' says Arkle.
Arkle feels unless consumers choose to save rather than spend the bulk of this tax benefit, the US is likely to see gross domestic product (GDP) rise to an above-trend rate during the second half of 2003.
'During 2004, the effects of the stimulus will be less but we still expect GDP of 3% for the year,' she says. 'Meanwhile, our forecast of 1.5% inflation in 2003 and 2004 reflects our expectation the Federal Reserve will continue to act to prevent these measures from pushing inflation lower by maintaining an aggressively stimulative stance.'
According to Johanna Kyrklund, head of asset allocation at DWS Investments, US GDP for the second quarter was much stronger than the consensus expectation of 1.5%.
'Equity and bond markets have both recently begun to believe in a recovery in the second half of the year and have performed accordingly,' she explains. 'This data, which provides concrete evidence a record level of policy stimulus is finally feeding through into economic performance, caused a rally in equities and a sharp sell-off in US Treasuries.'
Kyrklund believes the recovery will proceed according to US Federal Reserve chairman Alan Greenspan's expectations and stimulate the world economy.
'We will be watching leading indicators closely over the next few months to determine whether this improvement will last into 2004 or be another false dawn,' she notes.
Continued strength in housing market.
Policy stimulus feeding economic performance.
Increase in consumer spending expected.
Second half profits need to meet expectations.
Rally looks to have stalled.
Possible sell off if expectations not met.
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