Optimism is growing that the US market will recover to trend growth levels in the second half o...
Optimism is growing that the US market will recover to trend growth levels in the second half of the year as strategists look to add to equity positions.
In the eyes of Axa and Barclays, government bonds offer little value, corporate bonds still offer attractive potential upside for investors seeking a balanced approach.
Concerns over the duration of the war in Iraq and the potential knock-on effects on oil prices continue to add a degree of uncertainty to the markets. Even so, fund managers are growing increasingly bullish that US fiscal easing will help sustain consumer spending and fuel a moderate second half recovery.
Nigel Richardson, senior strategist at Axa Investment Managers, is overweight equities and underweight government bonds. He believes the global economy is finally undergoing a typical cyclical recovery underpinned by improving global economic indicators.
'The US has been the ultimate driving force behind the recovery in global activity in the past year or more. So far, the US has experienced a V-shaped recovery in activity in response to monetary and fiscal stimulation,' Richardson says.
'Indeed, despite a weaker tone recently, the key ISM business survey remains consistent with a return to a trend rate of growth in the US of around 3%pa in the second half of 2003. The key question from here, however, is whether this recovery in activity can be sustained.'
Haydn Davies, chief economist at Barclays Global Investors, is also upbeat on equities, noting the oil price slumped after news that oil fields in Southern Iraq had been secured, which removes one concern overhanging the market.
However, his optimism is tempered by caution on the US job market and the impact it will have on US consumption rates.
'It is easy to blame the war for the soft global economy, but the root of the problem is that global growth remains driven by US household spending. A sustained period with the price of a barrel of oil above $30 would drain households' purchasing power but it is the labour market about which investors are most concerned. The best thing that can be said about the labour market is that those finding work are just about matching those being laid off,' Davies says.
'For the time being the US economic recovery remains weak, but while there is little to suggest that activity is set to accelerate, neither are there signs to suggest corporate investment or household spending are likely to lurch downwards. Moreover, as weak as it is, the US economic environment remains stronger than the climate in Europe or Japan.'
As a result, Davies adds, government bonds continue to look expensive relative to equities, which he favours.
Richardson concurs, noting most major markets are now trading at or near fair value. He adds US Treasuries are overvalued, yielding 4% when 5% would be more realistic, particularly when looking at real returns. He says this reflects the pessimism still in the market, but adds the yield will increase upon evidence of a rally.
Concerns over US consumption.
Equities cheap versus bonds.
Economic indicators improving.
Consultation closes 28 January
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