“Growth rates in the US economy are likely to be weak. In particular, this outlook is underlined by the unbroken stream of extremely weak data on the US housing market, which is consistent with the previous phases of recession. All in all, we forecast real GDP growth in the USA to reach 1.3% in 2008 as a whole,” says Klaus Glaser, CIO (Equities and Asset Allocation), Raiffeisen Capital Management (RCM).
As corporate earnings tend to move in sync or with a slight delay to the economic cycle, RCM projects stronger impacts on corporate earnings trends in the months and quarters ahead, and forecasts new lows on the equity markets in the coming months. “Even during the bear market in 2000-2002 the market was repeatedly able to bounce back for short periods of time, only to later swing back on to the downward trend again. In cases of medium-term counter movements, the 200-day moving average frequently forms a line of resistance. And just recently, the market hit a wall at that point again,” says Glaser.
With regard to the euro area, Raiffeisen Capital Management also expects weaker economic activity, with growth of around 1.7%, thus falling below the potential rate. As a result of the turmoil on the capital markets and the severe downturn in the US economy, negative revisions of earnings forecasts have been seen across almost all sectors in Europe as well, and the extent of these downward revisions has increased sharply lately.
“In terms of valuations, however, European equities still look attractive, despite the negative revisions in the earnings outlooks. Even though we anticipate more negative revisions of earnings forecasts in the months ahead, the current valuations already reflect a significant degree of pessimism about earnings,” says Glaser. The enhanced economic risks will also lead to a prolonged period of higher volatility on the equity markets as well. RCM, however, is sceptical as to whether this phase of downward correction is over.
“Corporate data is increasingly suggesting that the economic downturn will impact on the credit markets. With this in mind, we project that the next market move following this temporary rebound will be a downtrend again. Over a one-year horizon, however, we anticipate that the equity markets should be supported by the US Fed’s interest rate cuts and improving economic prospects, consequently paving the way for rising prices, despite sagging growth in earnings,” continues Glaser.
On a brighter note, news on the Emerging Markets is not so bad. Global growth prospects for these markets are still on a solid footing. GDP forecasts for 2008 are ranging around 7%, and are thus slightly lower than in the previous year. “On the basis of the current estimates, the Emerging Markets are now responsible for over 50% of global economic growth, and even 80% if one assumes purchasing power parity,” says Glaser.
In this regard, one of the key aspects is the burgeoning domestic demand registered amongst consumers in these markets and the sustained, strong development of earnings in the corporate sector. Nonetheless, despite the increasing independence of the Emerging Markets, it is still too early to speak of a complete de-coupling, including independent economic cycles.
Prospects for the Emerging Markets still look positive over the medium term. Economic data and corporate results in the individual countries remain on a robust trend. Of course, there are still questions as to what degree the real estate market and credit market wobbles are finished and whether the impact on the global economy, in the form of a recession, will be worse than anticipated.
“The EM countries are not a safe haven for investment in equities, even though the current liquidity problems are emanating from the industrialised nations. But it does appear likely that the worries about a recession in the USA and the very high inflation figures in the first half of the year have peaked now, and that the low international level of interest rates and the sustained high prices for commodities will have a very supportive effect on the equity markets in the global Emerging Markets.” adds Glaser.
Even though the short-term prospects for equity investments are rather subdued at the moment, now is a good time to start systematically working towards the longer-term wealth development. Reasonable valuations of fundamentally solid companies currently offer investors excellent opportunities to start investing.
RCM warns against putting all your eggs in one basket. Along with portfolio diversification, it is advisable to make investments at regular intervals, for example in the form of a savings plan. By doing so, smaller investors can take advantage of the cost-average effect of weaker periods on the market as presently being seen, and even profit from them.