2005 is predicted to be a challenging year globally, especially for uk bond and residential property markets and US equities
Fund managers across the globe have predicted a disappointing 2005 across the majority of asset classes on the back of steadily worsening economic data.
The worst hit asset classes will include US equities and the UK bond and residential property markets but there is also positive news with forecasts of out-performance in UK equities and a stabilisation in Japan.
Edward Bonham Carter, chief investment officer of Jupiter Asset Management, believes that 2005 will be a challenging year for the market.
"I do not expect 2005 to be easy," he said. "The UK stock market has performed well compared with other major markets in 2004 and UK equities continue to look good value but markets are unlikely to race ahead because high oil prices, rising interest rates and a falling dollar have preyed on investors' minds."
The weak dollar has had its advantages, however. Andrew Clare, consultant financial economist of Legal & General Investment Management thinks that in 2005, the US economy will increasingly rely on corporate investment and exports, subsidised by a weak dollar. Clare expects this weakness to continue.
He said: "Given the uncertainty that still remains with respect to the correct level for the dollar, particularly against Asian currencies, we expect continued dollar weakness for the foreseeable future."
The dollar may remain stable, but the same cannot be said for interest rates, according to Bonham Carter. Fed rate rises are to be expected, and this, together with weak employment growth, will act as a brake on further growth in consumption. This is a particular threat as it was buoyant consumer spending, fuelled by tax cuts, low interest rates and increased borrowing that kept the US economy growing over the past few years. Bonham Carter further adds that the emerging competition from the economic powerhouses of Brazil, Russia, India and China, referred to collectively as BRICS, will continue to grow. This, along with outsourcing, will help keep a lid on inflation and wage rates in the US.
Mark Beale, fund manager of New Star International, thinks George Bush may have to make some tough choices in the first year of his second term in office. Taxes, for example, may have to rise and this could result in a difficult year for the US economy and stock market in 2005. The fact that US equities still look expensive against historical averages makes the resumption of a new bull market unlikely.
There are also problems brewing on the other side of the pond - in the UK residential property market.
The UK residential property market P/E ratio is currently close to 6.0 - an all time high and substantially above the level it reached in the late 1980s, according to Clare. But this does not mean that a downward turn is a certainty.
"The truth is that nobody knows for sure whether property price inflation will turn quickly to deflation or whether it will slowly peter out, giving a soft landing," he said. "All that we claim here to be sure about is that double-digit property price inflation will end at some point, probably in 2005, and, when it does, broader UK economic growth will slow too."
Meanwhile, European businesses this will continue to feel the pinch made by the decline in the dollar. Richard Pease, fund manager for New Star International, advises investors to pick resilient stocks which will create strong cash flow.
"Although opportunities still exist throughout Europe, Ireland is likely to continue to provide many attractive stocks," he said. "The Irish government's business-friendly fiscal policy is making the country a great place to do business."
This is contrast to Japan, which may have reached a peak. Clare said: "Forward-looking indicators have weakened somewhat, implying that the best may be over for the Japanese economy for now."
However, New Star fund manager, Michael Saunders, disagrees: "Going into 2005, Japanese equities look set for a period of catch-up relative to their global peers," he said. "Following the slowdown in growth during the latter half of 2004, the domestic economy looks set to regain momentum."
Saunders also adds that for much of corporate Japan, China is providing a new source of demand, as opposed to a competitive threat.
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