Falling corporate earnings and concerns over the extent to which the investment slowdown will effect...
Falling corporate earnings and concerns over the extent to which the investment slowdown will effect consumption have driven global markets lower this year, according to head of Invesco Global Products Group, Tony Broccardo.
"Recently, an underlying reason for the market's weakness has been the unwinding of excess investment," he says. "However, the latest US retail sales data is consistent with real consumption growth in the first quarter of 2000 of at least 2.5% per annum. Inflation is also low and the dollar remains firm."
Although not completely immune from the US, the European economy should grow at a healthy rate of 2.75%-3% per annum in 2001, Broccardo says, noting consumer confidence also remains high.
Chief investment officer at Martin Currie, James Fairweather, says: "In general terms, our view is that the markets appear to be oversold and are responding to six months of bad corporate news. It first started in the US and is now in Europe and Japan. Markets have moved downwards in advance of bad corporate and economic news."
However, Martin Currie does see positive equity markets in Japan and the emerging markets, areas in which Fairweather points to positive signs of change.
"In Japan, the government has recognised deflation is a problem and is holding interest rates at zero until inflation picks up," he says. "The banks have also been encouraged to write off bad debt."
Martin Currie has an overweight position in Japan as Fairweather says the market is cheap and equities are yielding more than bonds. Companies have more cash on the balance sheets and he expects liquidity to flow back into the market.
Head of global equities at ABN Amro, Wiepke Posema, is less positive on Japan as he believes the country is facing serious structural problems. Companies have had lower sales as well as having to deal with restructuring and it will take more than a year for problems to be worked out, according to Posema.
Broccardo also believes the situation in Japan looks difficult, with weak money growth and the effects of corporate restructuring preventing a recovery in consumption.
"The banking system is creaking under the weight of bad debt and the stockmarket has fallen to multi-year lows," he says. "We are encouraged by the Bank of Japan's recent response, which aims to ease the money supply by increasing banks' reserves but we still believe that further measures are necessary."
Martin Currie is also positive on the outlook for emerging markets because these countries move five to six months in advance of the economic momentum in developed markets. Fairweather adds that the political and economic situations have begun to improve.
In countries such as Brazil, Taiwan, India, Korea and Mexico, he retains an underweight position in Europe as he believes it remains more expensive than the US. He estimates growth is ahead of reality and is in the early stages of having to revise down, despite the fact that mergers such as those between Dresdner Bank and Alliance have helped consolidate the market.
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