Global growth is not expected to be spectacular for 2005, with US and UK consumer spending on the wa...
Global growth is not expected to be spectacular for 2005, with US and UK consumer spending on the wane and Europe remaining in the doldrums.
On a global basis, however, things are not all bad, as the fast-developing emerging nations, particularly China and India, looking set to make up the shortfall.
Richard Saunders, senior manager of investment management at Butterfield Bank Guernsey, says: "Looking ahead, the long-term background is dominated by many negative structural factors including record US deficits, soaring consumer debt, exceptionally low consumer savings rates and decelerating housing markets in the US and UK."
Butterfield Bank expects global growth to moderate in 2005, although Saunders does not think the slowdown will be too disastrous. He is remaining on the defensive side in case potential surprises emerge that could lean towards the negative side. Firms in the portfolio include those with relative predictability of earnings, highly competent management, sustainability of market share, a lack of major external threats, and the potential to consistently return cash to shareholders.
Patrick Mange, head of research and strategy at BNP Paribas, does not predict a disastrous hard landing for the global economies. He says: "In the US, household debt is largely financed at fixed rates and net wealth has reached a historic high, thanks to the rises in equity and real estate prices, which are liable to slow down but not collapse entirely. Long rates should remain low and demographic factors remain favourable to the housing sector.
"At the same time, growth in investment is likely to slow but the need to update equipment, the search for productivity and the more lasting nature of demand at a time of record cash flows should keep capital spending at a satisfactory level."
Elsewhere, Europe is still lagging behind the US. Hadyn Davies, chief economist at Barclays Global Investors, points out the eurozone economy continues to be afflicted by weak household spending and, with export growth slowing sharply, the outlook does not appear promising.
The euro has appreciated against the weaker dollar. Although this has been good news for US exports, it has put a dampener on Europe's.
"In Europe, economic indicators suggest industrial production will stagnate over the winter months and, with stock building having contributed half of the region's growth in the first nine months of 2004, there is a danger firms will cut back on production and only meet demand through their inventories," Davies says.
"With the euro at its highest level since 1997 on a real, trade-weighted basis, the eurozone's malaise is set to deteriorate."
The UK is also pointing towards a slowdown. The interest rate hikes have begun to have some impact on the housing market and consumer spending. Consumers have tightened their belts and sales figures over the Christmas period have looked grim. The housing market has been slowing down.
Davies points out that with mortgage approvals having plunged at their fastest rate since the collapse of the last housing bubble at the end of the 1980s, the outlook for house prices and consumer spending does not look promising. However, Mange is predicting a soft landing for the UK economy. He thinks income fundamentals remain sound as employment is still running at full capacity.
He says the emerging markets are rapidly moving away from their emerging status. These countries have been able to improve management of their tax revenues and debt. It is likely some could look forward to an upgrade in their ratings.
According to Mange, Eastern European countries will continue to benefit from their accession to the EU. The Asian countries will be boosted by the surge in Indian and Chinese growth.
India, for example, will benefit from spending on infrastructure as well as an increase domestic consumption. Furthermore there are rumours that the 2005 budget will announce tax changes that will be beneficial to foreign direct investments.
Saunders says: "There are also structural positives that go some way to balancing these negative factors, the most high-profile of which has recently been the ever-increasing importance of major emerging economies, such as India and China.
"On balance, we continue to believe the structural environment is such that reasonable equity market gains can be achieved in 2005."
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