Worse-than-expected economic data from the US last week reignited fears of a double-dip recession, but managers are cautiously optimistic the economy will remain supportive of global growth.
The latest labour market data shows new claims for jobless benefits have hit half a million, a nine-month high. Meanwhile, the Federal Reserve Bank of Philadelphia reported an unexpected fall in its manufacturing index from 5.1 in July to -7.7 in August, a worrying sign for one of the strongest sectors of the US market.
These disappointing numbers were no surprise, says James Harries, the manager of the £1.17bn Newton Global Higher Income fund. “We think a cautious view is warranted, and have thought for some time that the more optimistic expectations on the marketplace were likely to be disappointed,” he says.
Skandia’s head of strategy Rupert Watson says although the economic data lagged consensus forecasts, he still expects the slowdown in growth to be modest. “With Q2 GDP likely to be revised substantially lower and Q3 starting off on a weak note, concern continues to mount that the US is facing a double-dip recession,” he says.
However, Watson does not think sluggishness in the US economy will be enough to derail the global recovery. He says financial conditions are loose, companies are flush with cash and reporting strong overseas profits, while policymakers will step in to keep interest rates low if the economy remains frail. Meanwhile, the strength of developed Europe could be enough to carry the global economy.
“If the US economy were to fall back into recession, that would be unambiguously bad news for global equity markets. However, it is not clear that a gentle slowdown in the US is bad news, especially if economies outside the US perform well.
“We think the US growth slowdown will be modest and the economy will pick up again later this year and into 2011,” Watson adds.
Managers say there are opportunities to be found in this period of weakness. “Within this uncertain outlook, we think the businesses that are well placed to cope are attractively valued and out of favour,” says Harries.
“Ironically, the expectation of poor numbers from the US lead us to emphasise high quality, stable, US dollar denominated companies with a decent dividend yield in our portfolios.”
Watson says Skandia expects equities to rally into the year end, driven by very low interest rates and attractive valuations.
OBSR’s director of investment services Peter Toogood dismisses the idea of a double dip as unlikely.
“Despite the rises in risks to growth in recent months, Asia and the US should provide sufficient support to generate at least trend global growth. A reduction in policy uncertainty has also stabilised financial markets, and at this stage the possibility of a global double dip looks slim,” he says.
Clear and Present Danger
Dont be fooled by fund managers opinions-they have a vested interest in keeping money at risk. 'Buy and Hold' should now be 'Buy and Fold'.
The most shocking forecast came from one of the world's most respected institutions — I am talking about the Bank of International Settlements. Its the central bank of central banks!
The BIS provides proof that the sovereign debts of the United States are worse than the sovereign debts of PIIGS countries like Ireland and Spain. The BIS says the government debts in Spain are 73% of GDP and the debts in Ireland are 83% of GDP.
In the U.S., they're even bigger — 90% of GDP.
But that's nothing in comparison to what they're projecting for the future. The BIS says that, if the U.S. government allows current trends to continue ... The government debt burden in the United States will soon be worse than the debt burden in Greece! Ultimately, the debt burden in the U.S. will reach 400% of GDP, more than triple the debt burden of Greece today. And this is not any forecast; it's the projection from the Bank of International Settlements.
It's no secret the economic data in the U.S. and other major economies have rolled over. That's why bond yields have taken another nose dive — hitting record lows in Germany and nearing record lows in the U.K., the U.S. and Japan, The bond market is telling you directly ..."Forget the thoughts of recovery and hunker down for more economic pain and crisis."
No matter what you do, I urge you to stay open minded and think dynamically going forward. That means not accepting the status quo, not accepting mass hysteria, not following old models and old economic rules, Period.
That will be the only true way to both psychologically and financially survive not just the next few months, but also the next few years.
Posted by: Martin Smith
24 Aug 2010 | 22:53
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