An extract of the July 2009 edition of Investment Strategy:
Economic activity has yet to confirm survey data
Although the pace of the global economic contraction has indeed slowed, industrial production and firm manufacturing orders have yet to improve and unemployment continues to rise. Even though a recovery is taking shape (as acknowledged by both economists and investors) growth will remain well below potential. Investment, production and jobs data have not yet improved in the current manufacturing “mini cycle” driven by inventory adjustment, but should normally “catch up” with the leading indicators. Nevertheless, given the magnitude of the economic shock and its unusual nature (with frozen credit markets bringing global trade to a virtual standstill) the downturn may last longer than it normally would. Firms may be more hesitant than usual to resume production, investment and hiring, while consumers may prove more reluctant to spend or take out a mortgage to purchase a new home. Such a situation could discourage investors who fail to see the first promising buds of recovery blossom as expected, forgetting that most survey data so far merely suggest a stabilisation of economic activity. Although being able to rule out the possibility of a global depression was a great relief to investors they may soon become impatient.
Another challenge for economic policy
The impatience of investors and of some government leaders may put even more pressure on central bankers, who certainly do not need another burden to bear after almost two years of continuous intervention and boundless creativity. Central banks, and above all the US Federal Reserve, will have to implement strategies for gradually returning to more conventional monetary policy, while making sure not to rush things and risk smothering the nascent recovery. A key concern is whether the unconventional policy measures adopted over the past few months will pose a serious inflationary threat to the global economy. We are convinced that inflation is not a significant risk for two reasons: the weakness of growth and the impact of the new global economy, where keen competition limits pricing power and that few wages are still indexed to inflation. However we are also aware that the fear of high inflation can have disastrous consequences, such as expectations of rapid monetary tightening and upward pressure on long-term interest rates. It is essential that central bank and government authorities clearly signify their commitment to eventually normalising their monetary and fiscal policies, as they continue to nurse their economies back to health.
A bit more patience
Although it will not be easy, central bankers and government authorities will have to find the proper policy balance before investors regain confidence in the riskier asset classes. After the hiccups seen in equity markets over the past few weeks, technical factors no longer point to a marked correction in share prices over the near term, although volatility may once again come to the forefront as trading volume declines over the summer. We are therefore maintaining our neutral position with a slightly positive bias.
Read the full report in your own language:
– Italian (web page)
– Portugese (web page)
– German (web page)
“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).