Recent data releases continue to suggest the key economies are recovering, with the consensus view f...
Recent data releases continue to suggest the key economies are recovering, with the consensus view for US growth in 2002 rising to 2.1% from a predicted 1% growth at the end of last year.
Michael Deakin, chief investment officer at Clerical Medical Investment Management, says accelerating growth combined with a continuing strong liquidity background should provide a favourable environment for the US equity market.
Chris Tracey, global strategist at JP Morgan Fleming Asset Management, also notes improved growth but believes US equity valuations are too high to offer much upside potential. March was a positive month for all key markets but that was only enough to produce a flat quarter overall, says Tracey. 'The stars for the first three months lay in the east, where the MSCI Pacific ex Japan Index, in dollars, rose 4.4% and, within that, South Korea, with the Kospi index rising by a staggering 30.1%.
'Most remarkable of all was the revival of Japanese equities in March and the quarter producing a return of some 7%.'
For the UK, figures in March showed the economy grew by 2.2% in 2001, slightly below the Government's target range of 2.25% to 2.75%.
Despite this, Deakin says the UK economy remains robust, while inflationary pressures remain subdued.
He says the level of returns available on cash deposits and bonds remains unattractive and this should encourage an inflow of funds into the equity market as economic conditions improve.
Clerical Medical is currently overweight in UK, US and European equities, neutral in Japanese and Asian equities and is underweight in UK bonds. Deakin says: 'Conditions appear to be improving in mainland Europe. In Germany, business confidence has risen to pre-11 September levels. Confidence also appears to be rising in Italy, the eurozone's other laggard.
'A steady pick-up in economic growth aided by the recovery in the US, coupled with the boost to exporters from the undervalued euro, should prove beneficial to European equities.'
The economic outlook also appears to be positive in the Pacific basin region, according to Deakin, and he says healthy liquidity levels are likely to be supportive.
He says the relative weakness of the yen in Japan has boosted exports, although the government has yet to take the substantial action required to address key economic problems.
Tracey says equities are likely to continue to struggle until investors are more convinced about the shape of the economic recovery, the interest rate cycle and the degree to which corporate profits recover.
Tracey says: 'In addition, there are obvious geopolitical risks relating to an increasing unstable Middle East. But we do not see substantial downside if the major adjustment to bond yields has taken place, so we remain modestly overweight equities and neutral bonds at the expense of cash.
'If bond yields were to get back to over 5.5% in the US, we would be looking to buy on a tactical basis. Within equities we are underweight the US simply because valuations allow little, if any, scope for re-rating, while by the same token we favour the more relatively attractively rated valued markets in the west, namely those in the UK.'
US growth in 2002 rising to 2.1%.
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