GLOBAL - The global slowdown is set to continue into next year, but the recovery should be well in place by the second half of 2002, according to Britannic Asset Management's (BAM) market outlook for next year.
In fact, BAM reckons the UK and Europe are likely to outperform the US in economic terms, but cautions: “It will be a reasonably subdued recovery - we are not buying into forecasts for sharp increases in growth. We expect average growth in 2002 to be similar to that achieved for 2001 (US 1%, EU 1.5%, UK2%, Japan –0.5%). However, economic activity will be accelerating, rather than slowing as it has in 2001.
The outlook for bonds is less positive than 2001. They will continue to be a good source of income, but they have had a particularly good run over the last two years and will find it challenging to sustain these headline returns.
On UK equities Kevin Fenelon, head of UK large companies at BAM, said: The UK market has been one of our favoured market for some time and the outlook for 2002 is better than 2001. While the full impact of the global slowdown is still to be entirely reflected in corporate earnings, there are a number of strong positives going forward.” He cited:
* the cumulative impact of interest rate cuts throughout 2001 will take effect in 2002
* a belief the policy response to the slowdown and the US terrorist attack will be successful
* his view that equities are currently attractively valued relative to bonds
On US equities, BAM investment manager Alison Wright said: A great deal of bad news has already been absorbed by the US market and a number of key drivers now exist that make us very optimistic over the medium to long term. Better returns are expected next year, but caution still needs to be exercised near term.
Earnings growth was overestimated for much of 2001. US market liquidity decreased dramatically in over the year and for the first time since 1991, more money flowed into US bonds than it did US equities.
Levels of manufacturing business activity remain low and are likely to fall further before they improve. Unemployment is trending upwards, although this is a lagging indicator and is likely to continue to increase for a while even when growth returns to the economy. Rising unemployment is closely tied to consumer confidence which has also been falling. On the plus side, US consumers are traditionally very responsive to interest rates and the full benefits of the cuts in 2001 are still to be felt.
She favours midcap healthcare stocks, basics and capital goods and select software and semiconductor stocks.
BAM investment manager Stephen Hall said of Japan: “On the whole, it should be a better year for Japan than 2001. Japan is likely to produce a negative GDP over 2002, although some positive growth should start to emerge in the second half of the year. We believe a cyclical recovery is possible, valuations currently look attractive and any recovery in the US should help Japanese exporters.”
Among his favoured stocks was “beer!” He added: “We have a World Cup to look forward to.”
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