As the new millennium starts, the world economy enters a new era. Synchronised growth among the major regions will bring a global
economic boom for years to come. Inflation seems relatively muted but remains a key risk factor for markets.
The world economy is on a solid upward path rapidly approaching – and most likely exceeding – its longer term trend growth. In the US, a substantial increase in productivity has been driven by technology. But this improvement cannot maintain its speed – the labour market is showing signs of tightness and commodity prices are increasing. In addition, Europe will pick up substantially in 2000 and Asia will continue its improvement. We expect growth rates to switch from a U-form to a V-form, which in the past has typically led to cyclical inflation pressures.
This global economic environment will not be friendly for bonds. Yields will continue to move higher and the next steps of major central banks will be biased upwards.
We overweight Canadian and Australian bonds relative to US and run underweighted duration positions. Within Europe we prefer Denmark and Sweden. At current interest rate differentials, UK bonds are not attractive relative to the European continent, especially at the long end of the maturity spectrum. Swiss bonds are not attractive by any measure and should be substituted by European bonds.
Non-government bonds have attractive spreads around historical highs and should be overweighted. In times of increasing interest rates corporate bonds do provide higher diversification benefits since their yields tend to correlate negatively with interest rate increases.
The US is most advanced in the cycle, followed by the UK and Europe. Japan and Southeast Asia have turned around. Equity regions leveraged to stronger growth such as Europe and Japan/South-east Asia will be the beneficiaries of this upswing.
We overweight Asia because we believe that the broad-based restructuring of Japan will continue to result in improved earnings. During 2000 one should expect the
run-out of the strong fiscal impulse
of the past to lead to some jitters, as the market starts questioning the
self-sustainability of the upswing. This might well provide opportunities to enter the market or increase one’s positioning.
The balance-of-payments of non-Japan Asia is in better shape after the crisis of 1998, leading to stronger
currencies, better export activity and higher employment. This is already translating into higher incomes, supporting consumer demand and providing a sound basis for further economic growth.
Earnings growth estimates for Europe are shifting into solid double-digit figures. We like France, Austria and Finland in a European context and have started to build up Germany from underweight to neutral. The German equity market – characterised as cyclical and export-oriented – would be well-positioned for the upswing. The political environment is keeping us from overweighting this country.
A somewhat neglected stock market is Switzerland, which is more advanced in the general restructuring of its economy than its continental European neighbours. From a valuation perspective, Switzerland remains relatively cheap. We run an overweight position for this country.
The main risk comes from valuations which are demanding in most countries. Dollar strength will eventually subside as economic growth in Europe gathers momentum and the US shifts a gear down to non-excessive growth rates. If the dollar declines rapidly and/or interest rates move up sharply, one should expect substantial corrections in the US and to a lesser extent European equity markets.
Roman von Ah is chief investment officer at Swissca Portfolio Management, Zurich

Topics