By David Walker Goldman Sachs says the risk of recession in the US exceeds 50% and brokers ag...
By David Walker
Goldman Sachs says the risk of recession in the US exceeds 50% and brokers agree that Europe and Britain present far easier investment landscapes to master in the near term.
Schroder Salomon Smith Barney (SSSB) predicts the FTSE 100 will be 7,600 by the end of 2001 and 8,000 by 2002's close.
The group believes investors with heavy cash positions should be buying aggressively into the current market weakness.
The group said: "Last year was a downgrading year for economists and analysts and 2001 has started no differently. Profit downgrades are the price that must be paid for a more benign interest rate environment. We expect 8% UK earnings growth in 2001 with the forecast risk on the downside."
But Credit Suisse First Boston (CSFB) differentiates between market segments and said investors should be wary of the consequences the raising of Britain's minimum wage will have on listed companies.
CSFB said the small-cap sector of Britain's market could be most affected by the basic wage increase, from October 2001, of 11% to £4.10 per hour, as small-cap stocks derive about 70% of their earnings locally, compared to about 50% for FTSE 100 companies.
CSFB said: "Retailing, leisure and to a lesser extent transport emerge as the main sensitivities sector-wise."
Charles Stanley has made no changes to its model UK equity portfolio in the past month and retains as some of its top individual stock picks Shell Transport & Trading, BAE Systems, GlaxoSmithKline and Pearson. Its chief telecom stock of choice is Cable & Wireless and it selects Lloyds TSB among financials.
SSSB notes with some concern that Britain's largest 15 stocks now account for half of total market capitalisation in the UK and the largest 15 fund managers now own 27% of the UK equity market.
According to the group, this is why traditional stockpicking is receding and benchmark obsession is on the up.
In effect, UK fund managers and UK companies have outgrown the UK equity market, the research group said.
While the risk of recession in Europe and the UK remains low, Goldman Sachs calculations on 20 March show recession risks in the US and Japan have spiked to more than 50%.
After running their calculations past the critical gaze of their economists, however, Goldman Sachs reduces the likelihood of US recession to the upper part of the 30% to 40% range.
Europe can withstand even a large downward shock to domestic demand in the US, Goldman Sachs said.
SSSB said interest rate easing in industrial countries, in line with America's Federal Reserve, points to a market rebound later this year and a favourable outlook for 2002.
Despite the Fed's 200 basis point easing so far in 2001, volatility in equities and widening of corporate spreads and the rising dollar imply that financial conditions remain needlessly restrictive.
The brokers add that risk averse investor sentiment could see deteriorating profit reports in the near term and earnings per share for the S&P 500 index should decline by about 6% this year after double-digit gains in 2000.
UBS Warburg predicts the US economy will have contracted in the first quarter by 0.3% quarter on quarter but believes overall growth in 2001 will stand at around 1.4%, still below projected global GDP growth of 2.9%.
The lower starting base to the level of GDP in 2001 caused by the downward revision to fourth quarter GDP in 2000, to 1.1% quarter on quarter, from 1.4%, means that this is slightly lower than last month's forecast at 1.5%, UBS Warburg said in a recent report.
The broker predicts 3% GDP growth in America in 2002, compared to 2.8% in the EU and 3% in the UK.
Ben Walker, senior US equity fund manager at Gartmore, said investor concern has moved from US economic deceleration to corporate earnings.
"The key question is whether there is going to be a corporate recession in tech, media and telecoms rather than an economic one," he said. "America's tech businesses have raised so much capital in the past couple of years their cost base has ballooned while their top line has begun to slow."
He suggested investments in old economy stocks in the Dow Jones Industrial Average.
Europe remains one of the most attractive markets among brokers, mainly because of its resilience in the face of US slowdown.
SSSB said slowing eurozone economic growth that began in the second half of 2000 is still less rapid than in the US but investors should take particular note of companies in Germany, where new labour market regulations helped to dim business confidence despite lower taxes, strong exports and a weak euro.
Globally SSSB says markets are moving through the latter stages of the bear phase and it remains appropriate to be building exposure to risk via global sectors.
The sector focus should remain on high-beta groups with the most to gain from a stabilisation in earnings expectations. The risk of any position other than overweight on banks, technology and media continues to rise sharply, the brokers reported.
Standard Life recommends investors remain overweight in continental shares as the group predicts above average earnings growth this year even though telecom issues may weigh on the market.
Although the company believes analysts could be complacent about the effects on Europe of a US slowdown, Goldman Sachs's modeling of Euroland economics finds that the estimated risk of (Euroland) recession in the next 12 months is indistinguishably different from zero.
SSSB recommends investors overweight the Continental portion of their portfolio. The brokers' picks, however, do not accord with most fund managers' main geographic allocations, with SSSB recommending Norway, Austria and Belgium.
"This month, banks look attractive on our model, as do financial services and basic resources," SSSB said.
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