Banks begin post US tragedy allocation reviews

US SPECIAL – Investment banks are beginning to review their asset allocation strategies in light of the US tragedy on September 11, with most sticking to their long-term policies and noting that political events going forward may shape strategy much more sharply than the terrorist atrocities in New York.

JP Morgan Fleming Asset Management says it was already in a defensive mode prior to the World Trade Centre attack, with generally flat portfolios relative to their benchmarks. At present it is underweight in consumer cyclical stocks, and overweight positions in oils, a balance it intends to maintain until it receives more information.

The firm believes volatility will give rise to buying opportunities and it may consequently increase exposure to growth companies that appear oversold in sectors such as services and possibly technology

Japan is deemed as more worrying. In a statement, the firm adds: “Its Japan’s banking system was already in a state of near crisis on account of the large amount of bad debt it is carrying, and the falling value of the shares that the banks hold in their balance sheets.
“A collapse in demand from its largest trading partner, the US, would weaken the depressed economy, and the financial system, still further. It would also make it harder for the government to implement much needed economic reform, on which so much depends.”

Eureko owned fund manager, F&C, says its strategic outlook remains unchanged. Equities are expected to outperform fixed income and it believes equities have been oversold and that valuations have improved.

F&C says equity funds should be neutral in the US and that the US is likely to lead recovery and produce the sharpest rebound. Funds will continue to make marginal reductions in Continental Europe and the UK to fund additions to the USA while holdings in Japan are to be maintained on a highly selective basis. Sectors it picks out as potentially risky are oil, travel and insurance. Stock lending has stopped until further notice.

In terms of currencies, it says there is no reason to change its previous view that the Euro was underpinned and it will continue to favour the Euro strategically. “There is no call to change currency positions,” said the statement.

Merrill Lynch Investment management has issued a statement saying that, rather like reaction to the Gulf war, the eventual market and economic outcome will be influenced more by the political, diplomatic and financial responses than by the attacks themselves.
Prospects for a short-term contraction of the US economy have been increased and since consumer confidence looked weaker prior to the attacks, it now looks even shakier.

Merrill Lynch is confident that the Fed and US Treasury are likely to do as much a possible to spur economic activity and this means short term interest rates are likely to fall and that issuance of Treasury and other bonds is likely to rise.

With regards to equities, Merrill Lynch feels there is no reason to panic. Some sectors have material risks but even if consumer confidence takes a knock, fiscal and monetary policy may offset this, the firm says.

Fidelity Investments says that trying to ascertain the economic consequence is that bit harder as the attacks were political in nature.
The closest parallel, they say, is the Gulf war. Following a knee-jerk reaction investors gradually returned their focus to the economic and corporate factors affecting share prices and stockmarets recovered.

“It is difficult to separate the current emotion that investors are no doubt feeling from the ‘fundamentals’ of investing…we would typically caution investors from adopting a knee jerk reaction to the present state of the markets,” Fidelity concludes.

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