Entering into 2001, world economic growth is expected to slow. After the longest period of consecuti...
Entering into 2001, world economic growth is expected to slow. After the longest period of consecutive growth on record, the US economy is starting to wind down and the rest of the world's economies are taking note.
Global inflation remains well under control everywhere, except possibly Europe. As the US economy continues to slow, the euro and sterling have the opportunity to recoup some lost ground against the dollar.
Corporate earnings moment-um remains strong in the US and UK which means these are our favoured equity markets for the near future. We reached the peak in the interest rate cycle and we have retained our overweight in equities relative to cash and bonds.
As signs emerged that the strength of UK economic growth is slowing, pressure on the Bank of England's Monetary Policy Committee to raise interest rates further eased considerably. As a result, interest rates have remained at 6.0% for nine consecutive months.
Consensus earnings growth for 2001 is 10%, which, while lower than that forecast for 2000, is still more than acceptable given the uncertain global economic backdrop.
Recent weakness has meant that valuations appear to be relatively attractive on traditional measures, meaning we have become more positive, moving to an overweight position.
As in the UK, evidence suggests the US economy has started to slow from the unsustainable above-trend rate seen earlier in the year. Earnings momentum is still strong with expected S&P 500 earnings growth of 9% in 2001 on a bottom up basis.
Recent weakness in the US equity market means that valuations have moved to a more attractive level, particularly in many growth stocks that are expected to be a major beneficiary of Federal Reserve easing. This more favourable outlook has led Friends Ivory and Sime to adopt an overweight policy in US equities from a previously neutral position.
Within Continental Europe, recent figures from Germany and France indicate growth in the third quarter had eased, signalling Europe was not immune to the apparent global slowdown. Earnings expectations for 2001 are expected to deteriorate, reflecting both global economic slowdown and the waning influence of a weak euro that has proved so beneficial in 2000.
In view of this outlook we have decided to remove our modest overweight in Continental Europe, which has led to a reduction in our holding of the Invesco European Smaller Companies fund.
Far Eastern equity markets fared the worst, as investors became cautious about corporate earnings given the slow down in the global economy. Inflation appears to be rising but is not viewed as an immediate problem, although it does point to higher rates for next year that would be negative for equities.
Bambos Hambi is director of Global Equities at
Friends Ivory & Sime
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