With global growth inevitably slowing next year, fund management houses are mixed on the outlook for...
With global growth inevitably slowing next year, fund management houses are mixed on the outlook for 2005.
The world economy delivered its strongest performance in 20 years over 2004, but much of the fiscal stimulus that created this year's growth is expected to disappear in 2005 and weak fundamentals underlying Anglo-Saxon economies are likely to be exposed, fund managers believe.
Higher commodity prices are also likely to squeeze margins, and put pressure on earnings.
Peter Hensman, global strategist at Newton, notes: "The recent re-election of George W Bush as US president has given markets a fillip, as he was perceived as the more market-friendly of the two candidates. Yet, now he has been re-elected his attention may focus more on spreading US democracy and stopping nuclear proliferation abroad, rather than on lifting the domestic economy."
Even so, the rally in global stock markets since August has encouraged investors to switch into equities from low-yielding bonds and cash investments.
Nicholas Johnson, chief investment officer for Pictet Asset Management, says while the equity rally could continue into the New Year, bond markets are suggesting a renewed period of interest rate tightening may lie ahead.
Hensman is similarly pessimistic on equities in the near term. "Tighter monetary policies, lack of consumer stimulus, high commodity prices, limited pricing power and excess manufacturing capacity from Asia fuels our expectations that growth in 2005 will be much lower. Given the scale of the imbalances in the world economy and the uncertain effects of policy tightening on heavily indebted economies, there is even an outside chance of a global recession. Therefore, our preference would be for bonds over equities."
In terms of regional allocation, Johnson says exposure to the US is likely to be further reduced given the likelihood that dollar weakness will continue. Those funds would be redeployed to Asia ex Japan, as this region is likely to be the principal beneficiary of continued global growth and less vulnerable to further dollar weakness.
Newton is cautious on the UK and US, saying the consumer has driven most of the growth seen recently, but confidence is being reigned in. Similarly, Hensman says Europe is plagued by many structural issues, such as the ageing population and high levels of unemployment.
He is more optimistic on China and Asia. "In Japan, the improvement in corporate balance sheets, profitability and increased flexibility of the labour market are likely to support economic growth and equity returns. Meanwhile, the key positive we see for Asia and much of the emerging world is it potential to separate from US policy," he adds.
Outlook for bonds better than equities.
Picture for China and Japan optimistic.
Potential for Japan to separate from US policy.
Higher commodity prices squeeze growth.
Bush not focused on economic improvement.
Interest rate tightening may lie ahead.