Market Update February – Comment by Robert Parker

2010-02-23

The US: still looking good

The picture of rapid recovery is largely intact for the first half of the year, with GDP growth of 3.5% to 4% annualised.  However, the argument for a moderation in growth during the second half of the year remains valid with a rising savings ratio, less accommodative fiscal and monetary policies, a still high level of unemployment, weak earnings growth and still restrained bank lending resulting.  During this period, we expect growth to ease towards 2% annualised.

Europe: recovery only modest

The modest eurozone recovery is intact led by Germany, but severe differences between the member states are emerging and fiscal pressures are not only confined to Greece.  Eurozone growth in 2010 is unlikely to exceed 2% and although German and French growth may achieve this level, the drag of the weaker economies mayl result in growth of nearer 1.5% for the region as a whole. 

Japan: growth accelerating

The Japanese economy continues to accelerate and GDP growth for the first half of this year could come in as high as 3% annualised.  However, as with elsewhere, we expect growth to slow in the second half of the year, possibly down to 1.5%.

Market implications

Equities

Equity markets have had a difficult start to the year and although the pace of equity market decline should moderate in February, the short-term negative factors are likely to persist.  However, the arguments for a renewed rally in March/April led by quality high dividend sectors are strong and during late in the second quarter, the correction in emerging markets should be over with a renewed rally taking place during the second half of the year.

Bonds

 We believe given economic strength in the emerging economies and the positive growth surprises in the US and Japan, the recent correction in industrial metals should now stabilise with upward pressure re-emerging.

Commodities

We believe given economic strength in the emerging economies and the positive growth surprises in the US and Japan, the recent correction in industrial metals should now stabilise with upward pressure re-emerging.

Currencies

During the second half of the year, we believe US dollar weakness should reoccur as the US economy weakens, as eurozone fiscal problems get addressed and as the markets start to refocus on the problems of financing the US budget and trade deficits.  In the near-term, we believe a break down to 1.30 to 1.35 in the euro against the US dollar is highly likely.

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