By Mohamed Ali Bernat Morley fund management has predicted a convergence of economic growth rates a...
By Mohamed Ali Bernat
Morley fund management has predicted a convergence of economic growth rates as US and UK short rates look close to peaking.
Gerald Holtham, Morley's chief investment officer, admitted he had predicted the same thing a year ago but was sticking by his belief that US economic growth would slow to a soft landing with the UK providing a good defensive play and Europe a positive long-term story.
Jeff Currington, Morley's head of European equities, said Europe's GDP growth is expected to be 3.5% by the end of the year, above what has been seen in the past few years. He added the weakness of the euro and oil price hikes have put upward pressure on inflation with no sign of US-style productivity growth to temper this.
Holtham said global equity valuations would reflect lower earnings growth although the asset class would still outperform bonds for the year.
He said: "We are not going back to the mid-90s where we saw 20-30% returns, but we could see healthy figures around 10%."
Savings rates in the US dropped sharply in the latter half of the past decade while consumer spending continues to move upwards.
Holtham said another risk to the global economy could come if savings rates go up as consumers shrink away from expenditure as this could potentially lead to recession in the world's powerhouse economy.
Holtham believes Asia offers strong growth and attractive value. He said: "If you're looking for really cheap markets you have to look at Asia, especially Korea. There is a lot of bad news coming out of Korea but that's a positive as the good news is often overlooked. Some of those East Asian economies will rise from their cheap valuations but this depends on a stable picture worldwide."
Holtham is also positive on property with yields as high as 8%.
He added: "I don't see it outperforming equities like it has in the past year but if equity returns are around the 10% mark, as we are predicting, it will be a fairly close run thing."
Chris Laxton, Morley's head of property, backed up Holtham's assertion by reporting that property had returned 8.3% compared to a drop of 4.9% in equity returns and 6% for UK bonds in the year to 30 September.
Richard Prew, head of UK equities at Morley, said one of the problems he faced was in choosing whose advice to follow when analysts and brokers gave different forecasts.
Prew said brokers' sell bias meant they tend to be over-positive on stocks and cited the example of online bookseller, Amazon.com, which has had varying opinions on its fortunes.
He said: "Earlier this year a credit analyst at Lehman Brothers said Amazon was living on borrowed time and will run out of money in the next 12 months. I went to the broker and he maintained his buy recommendation." Prew said that, post-tech frenzy, he liked companies which had come down to realistic valuations, such as Arm Holdings, those which had changed their business models to address the new economy, like Tesco, and those which had the corporate strength to withstand negative sentiment on their sector, such as Cable & Wireless.
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