The US has shown alternate quarters of strong and sluggish growth, with the final quarter of 2002 ex...
The US has shown alternate quarters of strong and sluggish growth, with the final quarter of 2002 expected to show little growth.
However, forward-looking indicators began to point to improved conditions. Surveys on consumer and business confidence have recovered, helped by the recent market rally. In the event of a resolution to the situation in Iraq, the US consumer has the resources to resume spending.
In the UK, the prime drivers of growth remained consumers ' largely on the back of increased debt ' and government spending. It is a concern that the sharp increase in government spending is leading to higher costs of services.
In the eurozone, the European Central Bank responded to the sluggish economic background by cutting interest rates by 0.5% in early December, as both industrial and consumer confidence have been weakening in Europe. In Japan, although various measures were proposed to address the bad loans issue, no co-ordinated policy for stimulating growth was developed. However, the underlying health of the corporate sector improved.
In South East Asia, economies have continued to benefit from healthy export volumes. A strengthening of the US economy in 2003 should help but the possibility of a devaluation of the yen is a threat.
Central bankers are beginning to talk more about fighting deflationary pressures and further actions are to be expected if economies do not respond. This will provide a reasonable background for markets over the coming year but, in the near term, the threat of military action will limit progress. After struggling for most of 2002, equity markets now seem to be forming a base and the low point of early October is likely to be a support level in the face of adverse news. UK equities have more attractive long-term valuation measures.
The UK market underperformed in the late stages of 2002, in part due to pressures from domestic institutions seeking protection against further market falls. The first-quarter reporting season will be eagerly awaited as trading updates and results start to emerge.
During October, we trimmed our holdings in European equities and US equities but remain overweight equities as an asset class. Equity markets had risen strongly quite fast and we believed that markets might struggle to maintain these levels, so we took some profits.
Over the longer term, we prefer equities to bonds, where rising government debt and the longer-term outlook for interest rates is likely to subdue progress. Bond markets offer limited scope for gains although longer dated corporate issues should experience better conditions. Longer-dated UK yields remain unattractive compared to US and European bonds.
The commercial property market received an increasing amount of press comment following another year of strong returns relative to other asset classes.
The weakness in tenant demand in Central London and Western M25 office markets has continued but investor demand for properties with long leases to good quality tenants is still strong.
Equity markets seem to be forming a base.
Reasonable valuations in eurozone.
Greater upside potential of equities.
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