By Steve Cleal, head of balanced funds at Morley Fund Management Investors in global markets hav...
By Steve Cleal, head of balanced funds at Morley Fund Management
Investors in global markets have had to navigate some choppy waters this year. Their confidence has taken a pounding from a number of factors, including a stream of controversies surrounding accounting irregularities and malpractice at US companies and worries about the prospects for earnings.
A stream of weak economic data releases in recent weeks has fuelled fears the US economy is heading for a second bout of recession; the so-called double dip.
Bond markets benefited from the turmoil in the equity markets, surging ahead as equity investors fled for cover. However, in late July, the tide seemed to have turned, with equity markets starting to rebound and bond markets showing signs of cooling off.
The recent selling frenzy has brought valuations in world equity markets down to attractive levels. The exception is the US, where stocks continue to be expensive compared to other markets, although much better value than at the beginning of the year.
European equities are the best choice for sterling investors. We expect the euro to continue its rise against other major currencies, which will enhance returns from equity investment in Europe.
The global economic recovery remains on track, led by the subdued upturn in the US. Although the behaviour of the financial markets and the most recent spate of corporate scandals, notably WorldCom, has negatively affected sentiment, US consumers are continuing to spend and employment remains steady.
If conditions do not deteriorate further, the US economy will avoid a double-dip recession and continue to recover, albeit in a muted fashion.
The prospects for US corporate profits have improved recently because of slowing wage gains and higher productivity. We expect sustained profit growth to become more evident over the second half of 2002. In 2003, US profits growth could be close to 20%.
However, a number of risks remain. The slew of accounting impropriety scandals at US companies has left investors in a cynical mood. The requirement that CEOs certify the accuracy of their accounts to the regulators ' the first deadline was 14 August ' has appeased this distrust somewhat. However, investors are likely to take an extremely dim view of any further reports of accounting malpractice.
They are also likely to be extremely sensitive to the flow of economic data and the policy responses of monetary authorities, given the risk of global economic conditions deteriorating.
The fragile state of the heavily indebted Japanese economy, in particular, poses a risk to the world economy. The country's complex problems include a huge fiscal deficit, a rising national debt and a banking system riddled with bad debts.
Perhaps the biggest risk for equity markets is geopolitical. The threat of US-led action against Iraq and tensions in the Middle East continues to hover over world markets.
On balance, the prospects for global markets are positive, although volatility is likely to persist for some months.
Valuations down to attractive levels.
Improved prospects for US corporate profits.
Global monetary conditions supportive.
Financials negatively affected sentiment.
Investors sensitive to the flow of data.
Japanese economy ME tensions pose a risk.
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