Growth in the global economy remains slow, with poor earnings growth in the US, Japan and Europe. Wh...
Growth in the global economy remains slow, with poor earnings growth in the US, Japan and Europe. What optimism there is will come from a reform story in Japan and aggressive Fed action in the US.
John Praveen, managing director of global equities at Credit Suisse, says: 'Earnings have been very poor. The second quarter ended one of the worst for the US, being down more than 25%.
'European and Japanese earnings are also weak. What we are looking for is still a change in policy from the ECB and the Bank of Japan for a turnaround to happen.'
However in Europe, Praveen expects to see inflation come down. He explains a fall in food and energy prices will hopefully give the ECB enough flexibility to cut rates over the next year and provide relief on consumers' real income.
As regards Japan, Praveen says: 'Exports have collapsed which has had a big impact on the production side of the economy. On the consumer side unemployment is falling and average income is not growing.
But on the positive side, President Koizumi has come up with a reform process. The Bank of Japan plans to ease monetary policy and the weak yen has also given the economy some relief.'
In addition, Robert Lloyd George, chairman and chief executive of Lloyd George Management, says: 'We believe Koizumi now has a strong mandate for reform, and a strong earnings recovery by Japanese companies next year is highly possible.'
Praveen expects to see fiscal stimulus from the tax cuts in the US which should be positive news for the economy.
The fall in energy prices should give some relief and the increase in consumer confidence will help keep the economy afloat.
George says: 'The aggressive moves by the US Federal Reserve to cut interest rates and, more significantly, boost money supply, will almost certainly lead to a liquidity-driven rally between now and year end.'
However, overall the company favours Asia. 'Asia, unlike Latin America or the US, has a private sector saving surplus equivalent to 22% of GDP for the region. On a historic basis, the P/E multiple for the Asia and Japan region is at its lowest for 10 years ' 14 times prospective earnings.'
However, Praveen says Asia is experiencing weakness and a recovery is needed in the US and Japan for improvements to be made in Asia.
On a global point of view, Credit Suisse favours information technology. Praveen has an overweight position in this sector and says: 'Although cautious about the sector, within individual stocks there are still some good buying opportunities in semiconductor equities.'
He is also overweight in energy stocks such as oil and gas as there is a lot of under-investment in the industry and Credit Suisse expects to see a surge in this area.
Fund manager comment: Merrill Lynch
US stock markets continue to be volatile as a slew of corporate profit warnings from the technology sector adversely affected markets at the beginning of the month. In addition, the merger between General Electric and Honeywell fell apart as the EU officially blocked its progress. Defensive sectors such as healthcare and utilities performed better.
We favour the US market in a global context, believing it should lead an economic recovery towards the end of the year and note that the US 'old economy' may be close to an interest rate-led turnaround, due to the US Federal Reserve's aggressive monetary easing. However, we recommend an underweight position in European equities, as the European Central Bank's (ECB's) monetary policy is likely to remain relatively constrained, due to inflationary concerns. Japanese shares fell during July as the domestic economy continued to weaken. Semiconductor-related stocks and brokerages led the decline, while defensive sectors, such as utilities and pharmaceuticals, outperformed as the market focused on apparently reasonable valuations and visible earnings growth. The Liberal Democratic Party-led coalition extended its control in the Upper House elections, potentially allowing Koizumi to execute much-awaited reforms.
We retain our tactical overweight position in Japanese equities. Domestic demand remains subdued and deflationary pressures remain strong. We expect monetary policy to remain expansionary. Attention is turning towards structural reform but we believe that even at best this will take years to achieve.
Asia-Pacific and emerging markets declined overall, as weak corporate earnings reported in the US weighed on Asian markets and fears of possible contagion from the Argentinean financial crisis affected certain Latin American and emerging European markets.
Graeme Bamping is head of investment communications at Merrill Lynch Investment
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