Mar 31 2008
March 2008 - A light at the end of the tunnel?
Recently it has been difficult to open a newspaper or turn on the television without encountering the words subprime, recession or credit crunch, usually with the word crisis following somewhere close behind. So with all this doom and gloom is there any sign of optimism among investment experts?
The latest JPMorgan Asset Management Investment Outlook starts with what may be something of a statement of the obvious, pointing out that global stock markets continued to struggle in February amid concerns about US economic growth and credit writedowns.
However, Tom Elliot's report does pick out two bright spots, identifying that government bond markets and emerging market equities both performed strongly last month, with the former outperforming global equities.
Commodity investors also experienced a good month, as oil hit new record highs of over $100 (£50) a barrel and gold broke the $1,000 an ounce barrier. Food prices also made sharp gains, with wheat prices on the Minneapolis Grain Exchange rising by 25 per cent in one today.
Unfortunately, the report sees little reason to be optimistic about financial markets in coming months, outlining three key issues to be cautious over investments. These are the prospect of a recession in the USA and a general slowdown in economies worldwide, fears over increased inflation and possibly stagflation and continuing instability in the financial sector.
Indeed, writing in his weekly strategy report, David Shairp ponders as to whether US monetary policy has become "impotent". He underlines two issues. Firstly interest rate cuts do not seem to have brought the expected relief for mortgage holders; he points out that despite the recent large cuts by the Fed, US mortgage rates have not followed suit. The second area of concern over US monetary policy raised by Mr Shairp is the fact that the decline in Fed Funds has occurred with no corresponding expansion in the Fed's balance sheet which "hardly suggests much in the way of stimulus".
These sentiments are echoed by the Standard Life Investments Global Overview, which warns that things are likely to get worse in terms of market volatility before they get better. However, the report also highlights various positive issues across a selection of markets.
In the UK equities market, positive earning and dividend growth, as well as strong cash flow and share buy-backs are all seen as providing a ray of light for investors. In the wider European market, the prospect for mergers and acquisitions is singled out as an encouraging factor by the report.
For emerging market equities, the report points out that the commodities cycle remains positive and that some central banks across the globe will be able to ease monetary policy if inflation remains under control, though it does warn that "valuations remain rich in many markets". On the subject of monetary policy, the report recommends investors "watch what they do, not what they say", as central banks seek to balance various economic pressures.
The general view of grim news from the financial sector and better news from other areas is maintained in the Barings World Market Review. According to this report, the increase in the number of regional banks reporting losses or problems helped increase uncertainty in equity markets.
However, the report quotes, and agrees with, a statement by Federal Reserve Chairman Ben S Bernake, who said: "As a whole, the non-financial business sector remains in good financial condition, with strong profits, liquid balance sheets and corporate leverage near historical lows." And, according to Barings, this optimism is not just limited to the US, with the same being true in other countries. French power firm Areva, Japanese earthmoving equipment manufacturer Komatsu and Hewlett Packard all should all find market conditions favourable in coming months, the report added.
The ThreadNeedle Bull and Bear report also seeks positives among the general doom and gloom, pointing out that despite recent problems, earning expectations in main sectors in the US remain positive, something which could boost the US equities market. However, as well as the common economic worries, the report points out that the weak US dollar will erode returns for sterling and euro-based investors. The message over the US market seems to be one of wait and see with the report stating "economic conditions appear to be worsening but, ample stimulus from authorities should help stimulate growth later in the year". The report also states that the Asia-Pacific-based equities should largely ride out the global downturn. It says that despite inflationary pressures the long-term conditions that make the market attractive are still in place.
Commodities are again singled out as a potential bright spot in the Threadneedle Investment Strategy report. Writing in the publication, Sarah Arkle, chief investment officer for the firm, said: "Whilst the pace of economic growth is forecast to be slower in the Asian region, demand for commodities is expected to be high as government continue to spend on large-scale infrastructure projects". She added that the same demand is underpinning the economies of Brazil and Russia, which the firm expects to grow by five and seven per cent respectively in the coming year.
Writing in his blog, Leigh Harrison, head of UK equities for Threadneedle, sounds one of the most optimistic notes of all, saying the monetary policy is already having an effect on markets and should continue to do so. He said: "The equity market … is responding to cuts in short-term interest rates and a steepening yield curve, classic indicators that policy has switched to being very pro-growth and that corporate earnings and share prices will benefit in due course."
However, he did warn that there is evidence of deleveraging taking place among high geared investors as they seek to reduce their exposure in what is still an uncertain environment. To do so, he said, they will have to make short-term investments at the expense of their long-term defensive positions. This, Mr Harrison believes, indicates that the market may not be entirely confident as the level of the index suggests. The upcoming results season "will be very interesting", he concluded.
