Generale sees EMU opportunities
The global economy continues to demonstrate satisfactory rates of growth in all regions, with little inflationary pressure evident at this stage.
In the US, low unemployment or the maturity of the economic cycle have not had a negative impact on this benign outlook for inflation. As we expect lower growth in the second half of the year, further major tightening by the Fed is considered unlikely.
Although the recovery in Japan is stronger than generally anticipated, it is not on a scale to make a significant rate rise necessary.
Within Europe, despite some bright spots, the major economices show weak, though improving, levels of GNP growth. This factor, accompanied by high unemployment, strict fiscal discipline and weak domestic demand, is likely to lead to the continuance of a favourable stance by the monetary authorities. Emerging countries in general are enjoying better growth than in previous years.
As regards stock market valuation, the US market is overvalued according to all traditional measures. Tokyo is undervalued due to problems in the banking sector and the lack of structural reforms which have sapped the confidence of domestic investors. European markets are no longer undervalued but remain attractive because of low interest rates and strong corporate profits growth.
The surprising result of the French election and the spat in Germany over the revaluation of the Bundesbank's gold reserves have generated real concerns over the euro project being delayed or transformed into a soft" euro. This situation, however, may not be quite as negative as it appears. For instance, concerns over the euro have pushed the US dollar higher, with a favourable impact on European exports and corporate profits. This stimulus to the economy is therefore helpful in achieving the budgetary objectives of the Maastricht treaty. Moreover, a weaker Deutschmark is helpful for southern European countries through lower rates which themselves have a positive effect on the reduction of public deficits.
In our view EMU remains a political priority. Core European countries already function in an integrated way while the major economies have already converged sufficiently for monetary union to take place. During the next few months increased uncertainty over the timing and interpretation of the criteria will continue to have significant effects on financial markets, which will provide opportunities for fund managers to exploit.
Although all major stock markets have performed well in the recent past we remain overweight relative to bonds. Within equities, we are overweight in Europe as we believe that the positive trend of corporate profits growth is not fully appreciated by the market. Our underweight position in the US reflects our view that too much optimism may already be built into earnings estimates. We find Japan attractive over the second half of the year, particularly those sectors which will benefit from an improvement in the confidence of domestic investors. We remain positive on the long-term attractions of emerging markets.
In bonds, we remain cautious be-cause of the global growth scenario. Within this area, however, we remain overweight in Europe, attracted by the steep yield curve of the core countries of a future EMU while still finding some attraction in the convergence story for the markets of southern Europe and Scandinavia. Japanese bonds are still underweighted while a neutral stance is maintained for US bonds. Xavier Timmermans is with Generale Bank Asset Management in Brussels"