Reminiscence is not a strong suit of most investors. Anyone still standing at the end of this last y...
Reminiscence is not a strong suit of most investors. Anyone still standing at the end of this last year deserves respect, but in the bars of Leadenhall, they talk of almost anything else. Re-living the excited disbelief of early March, as TMT stocks floated higher on pure oxygen, or the dread of October, when valuations lurched lower with each indicator or result, is not the style of the City.
Talk is all of the future. Nothing too long term, though. The next six months is about as far as City visibility goes at the moment. But the mood is rather jolly. Last year's millennium bonuses would be hard to beat, but whinges are minimal, and confidence is growing. The global economic outlook for the next couple of quarters is not too bad, and among all world markets, the UK is in pole position.
However, it all rests on a soft landing for the US economy. With the uncertainty of the presidential election finally over, focus returns to the monetary bias of the real keeper of the nation, the US Federal Reserve. This seems considerably easier than even a month ago, and the market is already discounting a cut in the Fed Funds rate in the first quarter of next year. Indicators suggest this is reasonable, but the Fed is clearly reluctant to incite irrational punters in any way.
If the Fed obliges, the beautiful game is on again. The UK would respond first and fastest, with a surge in equity and bond markets. Moderate growth, low inflation, a slightly easier currency, all make for a benign start for 2001. The equity market has broadened out, making for a calmer operating environment and there is strong growth in small and mid cap sectors.
Europe has the most to lose if the US doesn't deliver. Eurozone GDP growth dropped off over the last two quarters and the apparent slowdown in the US is its big chance to boost relative attractiveness. Meanwhile the European Central Bank, still fighting a rearguard action for the poorly trained, poorly equipped and poorly led euro. But it would be difficult to raise interest rates if everyone else is cutting.
Where else? Japan? Puh-leese. Maybe in time for the next Millennium, at some considerable opportunity cost. How many fiscal stimulus packages have they thrown at the population? The Bank of Japan was just teasing with that rate rise bluff in August. Buy, or you'll do what? Raise rates again? Before we only suspected Japanese economic growth was dead. Now we know it is. However, one big caveat: if the official indicators are dodgy, and the situation on the ground is better than we can judge at a distance, there is huge, unmarked upside.
So that leaves, broadly, various emerging markets, which are a mixed bag, even before the looming technical default on its debt by Russia. Among the bigger players: China has already proved to be the engine of growth for Asia ex-Japan, supported by Hong Kong. India is enduringly chaotic but the information technology and pharmaceutical industries are well worth looking at.
Brazil has vastly improved fundamentals, but remains hostage to investors' strong aversion to risk. South Africa is also interesting. The rand currency is clearly undervalued and the corporate sector, rather than retreating into its increasingly illiquid domestic market, is quite prepared to do M&A battle worldwide. Tempted? Not just yet. Nasty things have a nasty habit of happening between Christmas and New Year. If you want risk, stay at home and buy Equitable Life.
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