An extract of the March 2009 edition of Investment Strategy:
Global economy still in bad shape
Recent economic indicators give no cause for optimism. Although the state of the global economy does not seem to be the key determinant of investment decisions, the current climate certainly has dampened risk appetite. The brutal slowing of global trade and economic activity at the end of 2008 has triggered massive downward revisions of earnings forecasts. After getting off to a difficult start, 2009 will be marked by recession as the global economy contracts. Although positive GDP growth is forecast in 2010 it is expected to be well below potential and apparently does not account for the full impact of the fiscal stimulus plans. However, statements by the US Federal Reserve and the G10 group of major central banks are gradually showing more optimism. For example, Jean-Claude Trichet, the G10’s spokesman, has affirmed that global growth will probably be around zero in 2009 before picking up in 2010. Investors however still seem unconvinced and are focusing on the bad news, such as the situation in Eastern Europe and fears that some euro-zone countries may have difficulty funding their budget deficits.
Financial system still a concern
The state of the banking system is more than ever the main subject of concern. Many commentators were disappointed by the US Treasury’s initial Financial Stability Plan presented on February 10, which they considered a bit vague. Although more information has been provided and the various measures of the Capital Assistance Program explained, there is still scepticism as some fuzzy areas remain. Upon completion of this programme, which requires that banks “stress test” their capital using highly unfavourable economic assumptions, recapitalisation measures will be implemented when deemed necessary. The amount of time this will require (two months for the stress tests and then up to six months to raise more capital from private investors or the government) is making investors even more nervous, particularly now that leading US banks and insurance companies have had to turn to the government for bailouts. This has raised the spectre of nationalisation, despite solemn statements by supervisory authorities that “banks must remain in private hands”.
Sceptical investors and turbulent markets
The US Treasury has taken the bull by the horns and its actions should ensure greater transparency and could therefore restore confidence. From a macroeconomic perspective we feel its approach is appropriate, particularly since it is accompanied by highly accommodative monetary policy, credit lines from the Fed to support the market for securitised instruments (and especially those backed by consumer and car loans), a fiscal stimulus plan and special measures to limit foreclosures. The scale of these initiatives in the United States is quite impressive and other countries have presented similar projects. However, over the past few weeks equity markets have once again shown that announcing new measures and plans is not always sufficient to convince investors to return to the riskier asset classes. Markets are therefore likely to remain turbulent for a while, particularly as speculation and rumours about the stress tests intensify. Since this uncertainty and instability is likely to maintain volatility at a high level, we prefer to reduce our exposure to equities for the time being.
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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).