An extract of the July 2009 edition of Investment Strategy:
A more favourable economic scenario for the near term is gradually taking shape, as may be seen by the recent increase in projected GDP growth for 2010. This upturn is most apparent in the United States where private-sector forecasters and the Federal Reserve both agree that economic activity should pick up in the second half of 2009. Indeed, signs of stabilisation in the manufacturing sector, and to a lesser extent in the housing market, are beginning to appear. Recovery in the emerging economies, and especially in Asia, has been surprisingly strong and has encouraged observers to raise their forecasts for the next few quarters. Monetary and fiscal policies have played a key role in the recovery of the Asian economies and are likely to continue to support activity over the next few months.
Investors like quarterly earnings
US corporate earnings for the second quarter were better than expected. Although this may be credited mainly to cost-cutting efforts rather than to rising sales, and CEOs are still quite cautious in their guidance, the outlook for earnings has improved. Furthermore, investors have responded enthusiastically to earnings figures, as reflected by the 8% increase in the MSCI AC World index since July 3rd, when our Investment Committee last met.
Better near-term visibility for equities
Both macro and microeconomic factors thus seem to be providing a healthier environment for equities and investment-gradecredit. As for concerns about the consequences of returning to more “normal” monetary policies, central banks are now explaining their positions in greater detail and Ben Bernanke seems to have convinced observers that the Fed will be able to conduct its “exit strategy” in a relatively smooth manner. How US monetary authorities are going to “manage” their shift away from their ultra-accommodative policies has been a risk factor not only of major importance but also of great uncertainty, since the result could be either inflation or in the contrary a brutal smothering of recovery.
As a result, visibility has improved in equity markets over the next two to three months, although some markets are starting to be overbought and investor enthusiasm in response to “good news” could dim if their growing expectations for the economy are disappointed. The recession however is still underway, as may be seen by the 3.9% drop in US GDP in the second quarter year-on-year.
We maintain our slightly positive bias in equity markets. Over the longer term however some investor concerns will reappear. These mainly have to do with the pace of global economic growth over the coming years, which may be restricted by deleveraging and less accommodative monetary and fiscal policies next year. We believe this concern will not be factored in right away however, but perhaps this fall or even at the end of the year, when strategies for 2010 are implemented.
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“Investment Strategy”sets forth the different asset allocation choices which are implemented in BNP Paribas Asset Management’s portfolios. The investment strategy derives from a running analysis of numerous factors (i.e. the general economic situation, earnings growth rates and financial ratios, assessment of market valuations, technical analysis).