Leading economic indicators in the US have bottomed and are starting to edge higher, leading some ma...
Leading economic indicators in the US have bottomed and are starting to edge higher, leading some managers to believe that fears of a recession will have passed by the end of the year.
Tony Dolphin, director of research and strategy at Hendersons, says industrial activity in the US will soon begin to strengthen, a point supported by Peter Lucas, global investment strategist at Ashburton.
That, however, may take longer to filter through to global markets, Dolphin says, where the fallout of the technology, media and telecommunications boom has yet to be fully digested.
Lucas adds: 'There have been a lot of concerns regarding the health of the US economy and its effect on the broader outside world. Our view is negative on the overall performance of equities globally. The fallout from the technology bubble has not been sorted out easily and the aggressive cuts by the Fed are yet to be transformed into a recovery.'
Lucas argues that the health of the global economy depends on how the US responds to monetary easing and tax rebates. He predicts the country will exceed expectations in the next six months.
Dolphin says: 'There is much doom and gloom around and investors fear the global economy is sliding into recession. Profits are falling, equity markets are weak and bond markets are strong. This is not unusual at this point in the economic cycle. Fear is dominant.
'We think the next few months will see the doom-mongers proved wrong. The global economy is close to a turning point. Leading indicators in the US have bottomed and started to edge higher. By the end of the year, industrial activity in the US will be strengthening and fears of recession will have passed. Activity in Europe and Asia, including Japan, will begin to strengthen three to six months after the upturn in the US.'
Like Lucas, Dolphin believes the US economy holds the key to the global outlook. 'The Fed has cut interest rates to 2.5% since the start of the year,' he says. 'Interest rate cuts normally take about six to nine months before they impact the economy. The first rate cut only came on 3 January this year, so the impact of the Fed's actions will only be felt over the coming months.
'Once the recovery becomes more apparent, we would expect equities to outperform bonds. But, because this is likely to prove a sluggish recovery, equities may not perform as spectacularly over the next year as they have done in previous recovery phases. Returns of around 20% are easily possible, whereas investors in bond markets look set to do considerably less well.'
Clouding the picture in Europe, according to Andrew Milligan, head of global strategy at Standard Life, is the process of gearing up for the launch of the euro. He believes consumers are worried it is not going to be a smooth transition, which will inhibit spending.
The Far East remains affected by the slowdown in the US, according to Lucas. 'In Asia, certain parts have been badly hit by the US downturn in technology,' he says. 'Parts of the region are in a very bad shape but pockets of Asia are performing well, which is relatively surprising given the fallout in the US.'
US lead indicators bottoming.
Industrial activity in US to pick up by year end.
Activity in Europe and Asia to follow US lead.
Equities to have a sluggish recovery.
Euro causing consumers to rein in spending.
Questyion over response of Asian governments.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till