GLOBAL - A "dire" outlook for Japan is shifting investor allegiance back to the US, according to Pictet Asset Management.
Low short rates, falling bond yields and a weaker dollar have also contributed to a refocus, says Pictet’s head of asset allocation Mike Collins.
But the global economy is still facing its “sternest test yet” with investor uncertainty rife, and weak euro-zone economies with high interest rates - despite “worst case economic scenarios” failing to materialise around September 11. “The US economy didn't collapse and the world did not plunge into a recession,” says Collins.
“Over the past year, the economic climate has been rife with [political] uncertainty but although confidence certainly took a beating, consumer spending has proven more resilient than widely expected.”
Prior to September 11, Collins believes that the global economy was coming to terms with the fallout from the debt and spending excesses of the 1990s.
“Structural headwinds may have eased a little as profits revive and corporate debt levels fall, but the downward pressure on growth will persist for many quarters to come.” US activity weakened in July and August, adding to investor bearishness, he continues.
“[But] there is hope that a combination of positive factors will provide the stimulus required to get recovery back on track. Recent sharp falls in bond yields and short term rates will provide support for activity in the coming months. What's more, US money supply growth has recently turned upwards. This improvement in liquidity is an encouraging sign but we will be keeping a close eye on money supply growth data.”
Another plus-point for the US economy is that Japan is currently “stuck in a rut”, explains Collins. He points to factors such as volatile industrial production and export levels, and high unemployment. Consequently, Japanese stocks are less appealing than in early 2002, initiating a modest switch from Japanese to US equities by summer-end.
Collins forecasts that whilst equities have fallen largely in line with falling earnings, the large declines in bond yields have made equities considerably more attractive than they have been for some time.
“That said, there is one valuation factor holding us back from advocating a more significant move into equities and that is the high level of corporate bond yield, indicative of America’s structural debt problem and the high cost of borrowing for the industrial sector. Such high yields are bad news for growth.”
He adds: “If the corporate bond to earnings yield ratio does move lower then the valuation case for a switch from fixed income to equities would be compelling.”
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