An extract of the September 2009 edition of Investment Strategy:
A lovely summer
The outlook for recovery in the second half of this year has become a bit brighter over the past few weeks, contributing to the rise in share prices, which were also boosted by surprisingly strong corporate earnings. Although the worst now seems behind us some clouds remain on the horizon, since growth will remain subdued for some time and sales are also likely to disappoint.
However, the current dynamic is positive. Private-sector economists, central banks and international institutions worldwide have raised their GDP forecasts. Securities analysts have also taken note of second-quarter earnings figures and have raised their earnings forecasts sharply.
Central bankers still cautious
Central banks are using very cautious language and are careful to point out the uncertainties that remain. Their attitude could have two positive effects: it could prevent investors from being overly disappointed by economic data when the pace of economic recovery slackens after the sharp rebound in manufacturing; and it could above all provide reassurance that accommodative monetary policies will be maintained. This is no doubt the objective of Ben Bernanke and his counterparts. This message also applies to fiscal policy. The OECD has thus pointed out that: “Preparing credible exit strategies and fiscal consolidation plans now, even if actual implementation will only commence later, is desirable”. The statement of the G20 finance ministers, after their meeting in early September, expresses this same idea: “we will continue to implement […] expansionary fiscal and monetary policies […] until a global recovery is firmly secured”.
The long-term environment for equity markets is buoyant
Given the positive trend in economic conditions and the attention that government authorities continue to focus on their economies, we do not foresee another marked slump in economic activity, but rather the stabilisation of growth below its potential. The exuberance in equity markets over the past few months (the MSCI AC World is up 60 % from its year-to-date low of early March) has brought investor sentiment indicators to very optimistic levels. Although they do not yet send a sell signal, the risk of a near-term correction has grown. However, since institutional investors are still substantially underexposed to equities this should limit the magnitude of any technical correction, particularly since valuations do not seem too high and the prospect of mergers and acquisitions is becoming an increasingly strong theme. We have therefore increased our overweight in equities a bit.
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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).