Global Shares Outlook
So much has been written about the events of the last year and, more particularly, the events of the last two months. It’s probably pertinent now to ask “Well, what about the year ahead?” We have a selection of responses to that question which make interesting reading.
Dresdner RCM Global Investors
Economic decline in the US was already underway prior to the tragic events of September 11th. However, the terrorist events have led the US government to focus on the maintenance of economic growth as one of its prime anti-terrorism measures and it has been quick to act. More money has been introduced into the economy and the level of government spending has been boosted strongly. Further measures are on the drawing board. These policies have served to stabilise the pace of the economic decline but rallies in the equity markets are expected to be brief and sporadic. Whilst we think that there will be a recovery in the second half of 2002, we think this will be mild and may be followed by a prolonged period of lower growth around the 2-2.5% level.
Wellington Asset Management, Boston
We expect the fallout of the attacks on the World Trade Centre and the Pentagon will have a measurable, negative impact on consumer spending. It is the resilience of the consumer that has allowed the US economy to avoid recession in the face of declining equity markets and sharp contractions in manufacturing and technology. Consumer confidence is declining rapidly. But there is some good news and there are some reasons why we don’t think we are facing a prolonged recession.
Over the past two months, disposable income for US citizens has risen due to people receiving tax rebates and the adjustment to income tax withholding rates.
At the same time, consumer spending has kept pace with average growth of around 2.5%, at least so far. The savings rate has gone from 1.0% in June to 4.1% in August. Given the recent events, we expect consumer spending to retrench over the next couple quarters, which may result in a still higher savings rate. Higher savings rates are a positive for financial markets of course, even if, for now, most of those savings go into money market and stable value funds.
There are a number of factors why the current contraction should not mirror the events of 1991.
1. First, even in the face of an ailing banking system in the early 90’s, monetary policy was slow in responding then. Now, the US banking system is healthier and the monetary response has been swift.
2. Second, President Bush Senior had just raised taxes, while President Bush Junior is cutting taxes, and more fiscal stimulus lies ahead.
3. Lastly, oil prices then rose, while - so far - they have declined (prices have recently been below $20 for crude - sharply below the $32 of one year ago. Natural gas prices are also falling dramatically).
Again, we are inclined to see this recession as milder than the ‘90/’91 downturn and look for an upswing some time in the first half of 2002.
Stephen Leeb writing in the US’s Personal Finance magazine on 4th November
Unless the U.S. is dealt another abrupt, traumatic psychological blow, the economy should be flying on all cylinders within the next couple quarters. . . . Because stocks rise long before a recovery begins, the odds are good that the recent lows in stocks will hold for the foreseeable future.
Merrill Lynch & Co., New York
There is little doubt that the conditions are in place for a near-term rally in equities. The market is massively oversold, signs of capitulation have emerged, and the Federal Reserve has created explosive liquidity conditions.
Perpetual Investments
There are two reasons why we are positive about the future for equities:
1. Interest rates are at very low levels. The returns on fixed interest securities (bonds) are at the point where they are likely to be overtaken by the rate of dividend payments on shares. This is particularly so in the case of European shares and bonds. Equities are attractive from an income perspective.
2. Our research shows that when inflation is low shares tend to trade at higher prices. At present, the price of shares on the S and P 500 Index is at an average level of about 18 times earnings. This is the typical level for the inflation rate we are experiencing right now. Inflation is likely to fall even further signalling higher prices.
However, we don’t think we are going to have a re-run of the 1990’s bull market. People will have to become accustomed to lower returns. Some recent market research about the expectations of US retirement plan participants showed that the average they expect to get is a heady 19.3% per annum. John Vogle, founder the huge US Vanguard fund has said, “If you want to keep getting 18% returns the average P/E would have to go to about 72”. The current P/E average for the market is 18. Through the 90s the average return for shares was 12% but the long term historical return is about 7%. We see equity performance returning to its long term average.
If you have over NZ$350,000 to invest and want truly impartial advice, contact us to find out how we can put your money to work to fund your important goals.
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