Apr 30 2008
Recent months have seen central banks cut interest rates in order to shore up the economy, ease the squeeze on credit supply and settle the nerves of investors, April has been no exception. But, with some predicting thousands of job losses in the financial services sector what effect, short-term and long-term, will such action actually have? Well, the Barings Weekly Report, published on April 18th confidently, and as it turns out accurately predicts that - at least in the UK - rate cuts alone will not be enough. It points out that "the latest reading of the three-month Libor rate - the rate at which banks lend to each other - was 5.93 per cent, well above the Bank's main lending rate of five per cent". Because of this, the reports predicted that the chancellor would step in to offer cash to ease the situation, something which he confirmed on April 21st. However, Barings is unsure if such a move will boost the economy. The gloomy situation is mirrored in the US with Barings pointing out that the country has a "lacklustre outlook" for manufacturing.
Meanwhile, writing for the Threadneedle Investment Strategy Sarah Arkle predicted that interest rates in the US are set to fall even further as the country looks to kick-start their economies. She said: "US interest rates are expected to be cut further, although at a more measured pace, to below two per cent and our expectations for year-end rates have been lowered to 1.5 per cent". She added that the rate cuts have "finally stabilised financial confidence" in the country, although this is still "fragile". And although rising oil and food prices are good news for commodities investors, the situation means that headline inflation will continue to be an issue, she stated. And demand for commodities is set to remain high, with the expansion of emerging economies continuing to drive demand for such products. Such markets, while not immune from the US slowdown, are likely to fair somewhat better due to higher demand in their domestic economies. This, and the "strength of company balance sheets and merger activity" means that such areas continue to prove attractive to investors.
This review is, to some extent, reflected by Edmund Brandt in the JPMorgan Asset Management Weekly Stock Market Report. He points out that while Japan struggled as its exporters were hit by the weak dollar, many markets in the Pacific area showed positive performances. He said: "Taiwan's stock exchange was the star performer, returning 3.6 per cent. Taiwan's March trade figures beat expectations, with March exports rising 22.8 per cent over-year-ago". However, he warned that inflation remains and ever present threat to the nation's economy. Meanwhile, Australia's All Ordinaries index was the region's worst performer, falling by 2.8 per cent. Mr Brandt indicated that the nation seems to be subject to the same worries as the English-speaking countries in the northern hemisphere. "Economic data was weak, with employment growth slowing, residential building approvals flat and falling business and consumer confidence," he stated.
Meanwhile, back in the UK the Threadneedle Globetrot-UK report outlines the difficulties that the Bank of England faces in trying to balance interest rate cuts with the threat of inflation. Its task was complicated by indications of continued price pressures keeping CPI above the central bank's two per cent target rate, with inflation rising to 2.5 per in February, the highest level in nine months," the report stated. However, stronger than predicted retail figures are some ground for optimism, it added. Writing in his blog, Leigh Harrison, head of UK equities for the firm sounded an even more pessimistic note. He said: "The real surprise from here might well be that the stormy waters all lie ahead of us and not in the recent past." He believes that the economy in the UK will struggle to show any meaningful growth in the coming months, or perhaps even years.
However, the situation for investors might not be as grim as is made out. In the JPMorgan North America week under review report Edmund Brandt points out that while economic data releases have been, they are increasingly being ignored by investors. He also points out that 58 per cent of the companies who have issued reports so far in the current earnings season have beaten expectations. Though the fact that 41 per cent of such firms reported lower earnings than in the first quarter of 2007 means that this is only grounds for cautious optimism.
The Standard Life Investments Global Sectors Report paints picture of markets dominated by "continued volatility". Keith Skeoch, chief executive explained that while this could be bad news for some, those who change their strategy might stand to gain from the situation. He said: "It is at times like this that an investor must adopt a longer term timescale, see whether the overall balance of the portfolio remains sensible and look for oversold assets which can be bought cheaply, but which have the opportunity of giving good long-term returns. His colleague, Richard Batty, adds that long-term opportunities in assets such as investment grade credit, high yielding equities and commercial property. Although he warns that short-term volatility means that such investments are not for the faint hearted.
Finally, the Threadneedle Bull and Bear report suggests that there might be some respite from the economic turmoil to be found in European markets. It points out that recent economic data seems to indicate that the EU economy is resilient. Furthermore, the strength of euro means that returns will be enhanced for those outside the eurozone. However, the region will not escape volatility together. The strong currency will impact on exports and it also faces the same inflationary pressures that the UK does, meaning that interest rates could be difficult. It concludes by stating that the EU economy is lagging behind the troubles seen across the Atlantic in the USA. This means that while the area's economy is likely to be stronger than that of America this year, it may well be weaker the year after.
