Fund manager's comment/John Richards
We saw subdued equity market performance during June. In the UK, the FTSE All-Share fell by 3%. Abroad, the Eurotop 300 declined 3.1% and the S&P 500 went down by 2%, while the Nikkei 225 fell by 6.5%, all in sterling terms.
In addition, economic and corporate newsflow deteriorated, with a large number of firms in the US pre-announcing lower profits and citing difficult trading conditions in Europe and Asia.
July provided further evidence that the dramatic downturn in corporate spending and investment is not a phenomenon restricted to the US but is happening across the world. This is not such a great surprise considering the global economy is a integrated entity, with the increasing reach of multi-nationals, closer links in financial markets, and, of course, international trade.
While this is creating bad news for corporate profits for this year, the crucial decision for investors is to determine whether we are on a prolonged path of weaker growth, deleveraging in the corporate sector and falling returns on capital, or whether the downturn can be arrested by the mixture of monetary policy, cheaper new opportunities and the passage of time bringing an end to de-stocking.
The future course of monetary policy is the key. In the US, the intentions of the Fed are clear. Aggressive rate cuts will continue while unemployment is rising and companies are deleveraging. This has the effect of slowing the consumer and housing sectors, which are important because, should they falter, they have the ability to induce a serious recession.
Although the deterioration in demand is now widely seen as a global problem, there have been few signs of a similar sense of urgency in policy responses anywhere outside the US. This is a concern for investors but it is also now the biggest source of potential for markets.
In Japan and in Europe, central banks are coming under pressure to take some risks and reflate economies which are already in recession in some cases ' Japanese GDP fell 0.81% in the first quarter. Any material moves would be welcomed by equity markets.
Reflation outside the US has the added benefit of easing the much-quoted imbalances in the US, namely the trade/current account deficit, which is now close to 4% of GDP, the low personal savings ratio and the high dollar, which recently traded at a 15-year high.
Given the track record of central banks in Europe and Japan, you may feel I am clutching at straws. But the world has needed a wake-up call for some time to understand that the US consumer cannot be the buyer of last resort in perpetuity ' and this may just be it.
We remain overweight the UK, Europe, Asia Pacific and Japan, while still underweight the US.
John Richards is chairman of SGAM's asset allocation group
• Downturn in corporate spending
• Consumer sector may slow further.
• Few signs of urgency in policy responses.
• Course of monetary policy is key
• Aggressive rate cuts will continue in US.
• Equities would benefit from reflation moves.
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