SGAM chief executive nicola horlick predicts good prospects in the US where interest rates are falling and consumer confidence is high
SGAM chief executive Nicola Horlick is predicting that growth investing is due for a comeback and that the US offers investors the best prospects during 2002.
She said the leading indicators are already pointing to recovery, and more importantly perhaps, a synchronised recovery, even though sentiment has lagged this.
'We have been in a bear market and are probably still in a bear market,' she added.
Among the factors she highlighted in the US were the unprecedented fall in interest rates and the pick-up in the National Association of Purchasing Management, which historically has been a good lead indicator for GDP.
Furthermore she said the steep yield curve should support economic recovery and she did not expect US rate rises until the third quarter.
Key to SGAM's scenario of a US pick up is the attitude of the US consumer, who has so far held up well, helped by low rates supporting a strong housing market at a time when real increases in wages are taking place. For Horlick, this explains why there has been a soft landing for the economy.
Consumer confidence has improved since 11 September and with unemployment beginning to tick up Horlick believes this will delay any rate rises until the third quarter, while any rise then will not necessarily be disastrous.
She said real rates in the US are negative and the key question is when the Fed will take them to a neutral point.
Horlick is also confident that the US government can take up the running should the consumer begin to tire. Tax cuts and increased government spending should be a big positive, according to Horlick.
She said: 'The US government is spending money and allowing deficits to build, which is something that hasn't happened for a while.'Within Europe SGAM also sees recovery but since the ECB has proved more reluctant to cut rates than in the US, the group predicts any turnaround will be more muted.
Within Europe Horlick picks the UK as having the best prospects, although not as good as those for the US.
She said: 'The UK has its lowest rates for 40 years but there is fiscal tightening not seen in other countries. The US is actually cutting taxes while the UK is putting them up. So there will be recovery but not as strong as in the US.'
SGAM calculates equities as fair value when compared to bonds and sees any decline in bond yields as a positive for equities. Turning to possible negatives in the outlook for global markets, Horlick cited political unrest in the Middle East which has lead to a spike in the oil price.
However, she pointed out the global economy was far less dependent than it was on Opec in the 1970s, partly because there are now many other sources of oil but also because alternative sources of energy are increasingly coming on line.
Horlick said: 'Low energy costs are good for recovery and oil is very cheap in real terms at $26 a barrel when compared to the 1970s.' Since 1998 global core inflation has picked up despite the economic slowdown, helped by consumer spending and higher energy prices, but she said that in the US core inflation is now beginning to dip, even if it is still rising in Europe.
A final possible negative would be an early move up in rates, although it is not SGAM's view that this is likely to happen.
Horlick said: 'Life will get better but low inflation means lower returns. In the past we may have been used to 20% returns but with inflation at 15% that is a low real return. We will have to get used to returns of 6%-8%pa but after inflation of 1.5%-2% that is a good return,' she said.
She gave as an example of this drug companies, now able to use their technology to catch up with their rivals' products quickly, giving the original company far less time to enjoy its effective monopoly, recoup the cost of its research and produce profits for shareholders.
Overall Horlick concluded equities represented a better growth prospect than bonds and on an asset allocation basis she favoured the US, followed by Far East ex Japan as a play on the US.
Next in line she favoured the UK as a reasonable value proposition with the emphasis on growth investing to catch any bounce back, then Europe then Japan.
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