Optimism, albeit cautious, about the US equity market is the view emanating from Trish Bridson, assistant director and head of North American equities at Kleinwort Benson in London.
She says: “We see growth of between eight and 10%, driv-en mainly by earnings growth which we also think will grow by around 10% this year.”
Bridson sees the high levels company valuations as the major cloud on the horizon although she also has worries about the strength of the dollar. “Company valuations, while not expensive for this sort of period of low growth and low inflation, are much higher than the long term average,” she cautions.
“The long term average p/e on the market is about 15 times. We are now at about 18 times prospective. We are not worried about 18 times. We just don’t think it will go much further.”
She adds: “The other concern is dollar strength and whether that will have an impact on our earnings forecast for later this year. Obviously the dollar has been very strong, and that affects the translationof earnings from overseas and the competitiveness of the US. It is certainly something that we are keeping an eye on.”
In terms of the best performing sectors, she says: “I think the best performing sectors are going to be the ones we have already seen in the last couple of years. Most notably, pharmaceuticals will continue to grow, as a result of favourable demographics. We also like the technology sector where we are keen on computer services companies that are benefiting from outsourcing from other companies.
In terms of a possible market correction she says: ” I am not with the 40 per cent people. I think that any correction will be more in the region of 10%.”
On the fixed interest desk at UBS in Zurich, developments in the real economy are being closely followed. Rolf Baxhammer says the market has absorbed the “shock” of 1996’s fourth quarter growth.
“As we see it,the US economy at any point might accelerate above potential, but that would not be sustainable and the economy would come back to potential without a major inflation and other repercussions” He adds: “If you look at the US economy it looks about as good as you can get”.
What could be worrying is the if there was “a little creep up in wages”. “It is not that we are concerned about inflation picking up, but that it might affect market sentiment.”
The market may be “slightly overbought” at present. This could mean a setback in the near future, which might set rates moving in the direction of 7%. But he regards this a a minor deviation. “The long-term trend takes us close to 6%, later in 1997. To have the economy operating at below potential is what make bond markets feel that inflation is not a threat.”