An extract of the February 2009 edition of Investment Strategy:
A faint glimmer of hope
There can no be no doubt that the global economy is in recession. The IMF is predicting the weakest GDP growth in 2009 in over 60 years and there are very few signs that the situation may improve any time soon. One rare and also weak positive signal is survey data in the United States, Europe and China that point to stronger consumer and business confidence over the next few months. This may be a sign that households and firms are beginning to have more faith in the various measures their governments have announced.
Spotlight on economic policy
Over the past few weeks central banks and governments have once again stepped up their efforts to bolster credit markets. The US Treasury Secretary’s announcement of a new and larger “financial stabilization plan” in early February (which has been expanded since) is one example. More fiscal stimulus plans are also in the pipeline, although some modifications may be necessary before they receive final approval. In short, as it becomes increasingly clear that we are in a recession, national governments and central banks are stepping up their response and making sure their efforts are known. After slashing their key policy rates to very low levels, central bankers are now gradually shifting to unconventional measures to directly reduce interest rates in the private sector and get credit flowing back to businesses and consumers. Based on a careful assessment of current financial and economic conditions, this approach has already been successful in lowering US mortgage rates. To reduce interest rates on automobiles and other consumer credits and on loans to firms, the Fed is about to implement its programme to support securities backed by these loans, as announced last November.
Communication is essential
Central bankers have also understood that given the exceptional nature of the current financial crisis they must keep financial services firms and economic agents well informed. However, announcements of new measures have not yet succeeded in reassuring investors. The actions that central bankers have taken are complex, largely unprecedented, tricky to implement and hard to explain. Investors could be more confident in these measures if they saw concrete signs that they are working, such as an increased flow of credit in response to cuts in interest rates.
Not exciting equity markets
Despite the wide-ranging efforts of government officials and the vague hope that economic indicators will stabilize after dropping sharply since September, many things remain uncertain. Foremost in the minds of investors is the soundness of the financial system, with concerns that go beyond the writing down or off of assets. The global recession and the credit crunch do not augur well for corporate earnings. Although current share prices reflect these concerns, it is hard to imagine a potential catalyst for equity markets, although we do believe that the policies and measures implemented will be effective. Over the near term we expect to see a lot of caution and volatility in equity markets and are therefore maintaining a neutral position since we see no clear trend taking shape.
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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).