The US is still slowing down, corporate profit warnings are increasing and it is possible oil prices...
The US is still slowing down, corporate profit warnings are increasing and it is possible oil prices could rise. But a recovery is expected by the end of the year.
Richard Jamieson, investment marketing manager at Scottish Life, says: 'The US economy is in a slump and despite Greenspan's efforts, there have been no real responses to demand-raising measures.'
The consumer boom has stopped and people are saving more of their income, according to Jamieson. In the retail sector, this has added to the problems in the economy and the rise in corporate profit warnings.
Andrew Milligan, head of global strategy at Standard Life, says: 'Oil and gas prices have been a major factor in the slowdown of the US.'
He warns of the possibility of further increases in oil prices if OPEC continues to cut supplies.
In addition, Milligan says: 'There could be energy price spikes because of difficulties in gasoline and electricity industries.'
He explains it is under- investment in the area which could lead to these fluctuations.
In contrast, Jamieson expects energy and oil prices to keep to a stable level.
'The only positive area at the moment is the strength of the US dollar,' says Jamieson. But he warns that a lot of investment in the US is dependent on the strength of the US dollar and if it starts to fall, the markets may deteriorate further. He expects it to keep at its current levels, but that optimism is based on sustained consumer and investor confidence levels.
On the whole, Jamieson expects the economy to recover. He says there will be another three months of warnings but by the end of the year he expects to see some turnaround in the economy and shortly hopes to see some more positive signs.
He adds: 'Interest rates have come down which will increase people's willingness to start investing in the economy again.'
Milligan says: 'It is an interesting time for the markets and economists, as we are now nine months into the rate reductions by the Fed and in the middle of the tax cut season.'
Standard Life has a bullish view. Milligan says: 'The monetary changes are working and we expect to see some signs the economy is picking up in the third quarter.'
Standard Life favours the consumer basic materials sector. Milligan explains investors have started to price in recovery for domestic demand and Standard Life is overweight in consumer- related stocks such as financials. He favours stocks that will provide growth.
However, Milligan does not favour technology, telecoms or defensive sectors.
fund manager comment: Clerical Medical
If you were a believer in the second-half economic recovery that was widely touted at the start of the year then you will be unhappy with July's preliminary economic data. Fortunately, there were few believers left in that scenario come July as evidenced by the 6.5% drop in the S&P500 over the first half of the year. Still, the news must have hurt since the market proceeded to trade lower throughout the woes of the July reporting season, and is only starting to show signs of life now that season is all but over. Forecasts have come down, but are still relying on that second-half recovery materialising in the 4th quarter, fuelled by a heady mixture of rate-cuts and tax rebates. But will it?
If the CEOs at some of the tech bellwethers are to be believed then the US economy is showing signs of stabilising, which is an essential prerequisite for it to start on the road to recovery. This would be good news if it proves to be true, but their economic forecasting talent has not exactly been a strength of late. What they added was that the rest of the globe continues to worsen which is not positive for the earnings outlook. In addition, evidence is beginning to mount that the consumer is beginning to flag. Up to this point, the consumer has been a rock of support for the ailing economy, as the corporate sector has collapsed. Just as the corporate sector is avowed to be stabilising, consumer confidence indicators are beginning to weaken. These rebate checks are what most economists are counting upon to lift the economy through the 4th quarter. The reality could be different and the outcome should prove an interesting test of corporate strength.
James McLellan, director, international equities for Clerical Medical
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