Cyclical bias emphasised
Continuing optimism on our global growth estimates means we have further revised up GDP
forecasts for this year and next to 2.9% and 3.0% respectively.
Using a number of top-down and bottom-up elements to highlight our investment process and based on the view that inefficiencies exist in the pricing of global markets at the country, sector and stock levels, we seek to identify discrepancies at an early stage and exploit them to add value.
Our current belief is that the most notable change in the global arena is in the US and we have recently been more cautious, although we believe that the market has already discounted near term economic concerns.
We will look, however, for opportunities to re-build weightings taking advantage of any bouts of market weakness over coming months.
A soft landing in the US is forecast in 2000 (2.5% from 3.5% this year) with the slowdown counterbalanced by an acceleration in Europe and Japan.
Overall, our portfolios remain overweight technology stocks, financials and the energy sector and underweight stable growth and consumer orientated sectors.
An overweight position within Europe continues to emphasise our cyclical bias. Investments are carried out on a pan-European basis and we have continued to overweight basic industries, capital goods, and more recently financials with an overweight position in banking stocks.
Utilities have been overweighted by adding to telecommunications stocks and we still run an underweighted position in consumer goods.
This positive stance overall takes account of the fact that within Europe, the rest of the year will continue to be characterised by uncertainty and nervousness about the economic outlook and the direction of equity and bond markets.
Increased fears over Y2K will
compound these issues with a consequent reduction in market liquidity.
In spite of this, we take the view that the consensus will continue to move towards a more positive view of
economic growth and that cyclical
sectors will once again be favoured. Going forward, the portfolio will be positioned for accelerating economic growth in 2000 and beyond and investment maintained in those growth companies that despite relatively high valuations, are delivering positive earnings momentum through the secular growth in their industry.
Caution remains over peripheral Europe though.
Sector wise the continued strength of cyclicals is expected (and hence emerging markets) on the back of global growth and we remain exposed to banks and telecommunication stocks as plays on specific country growth.
In relation to emerging markets, we believe there will be a greater focus on Y2K compliance or lack thereof.
We moved to a positive top-down view of Japan in the third quarter, as opposed to the previous bottom-up driven, selective stock-picking stance. Our target is now overweight the index - maintaining a commitment to companies that have embarked on a coherent restructuring agenda and possess the management resolve to go one stage further. Positives for the market include cyclical factors, liquidity and corporate restructuring and corporate news continues to have upbeat implications for the market.
Consequently, we have moved to an underweight position in US-linked assets, focusing more on the Japanese recovery and strong yen scenario (hence Korea and Taiwan will benefit).
Economic recovery in Asia ex Japan has also been unexpectedly swift and strong. It is expected that GDP growth in this part of the world will
be sustainable although not as robust in 2000.
We retain a pro-cyclical bias in the region, continuing to overweight Australia but going negative on Hong Kong where blue chips are highly correlated with interest rates, valuation levels are excessively high and equity issuance is expected to increase.
American Express Asset Management (AEAM) has global assets under management of $206bn with typical global equity portfolio holdings of between 60-90 stocks.
Geographically, the world is divided into five autonomously managed regions: North America, pan-Europe, Asia, Japan and emerging markets.
This recognises that while there is a core strategy driving the global investment process, each region requires a customised approach.
One important feature concerns the identification of global themes such as restructuring and demographic trends, for example, the ageing population in the developed markets and, conversely, strong population growth in the emerging countries.
John O’Brien is global investment director at American Express Asset Management in London