Tuesday 9 November 2004

Investment outlook after the US elections

The stock market rallied last week after President George W Bush gained re-election. However, Citigroup Asset Management's Anthony Muh prefers to look at long-term economic fundamentals. Excerpt from The Edge Singapore:

Stock markets in Asia as well as across the world reacted positively last week to news that US President George W Bush had been re-elected for a second term in office. But for managing director and regional head of investments at Citigroup Asset Management Anthony Muh, who the US president happens to be matters less than what he's going to do. "It's the long-term economic and corporate fundamentals that are important," Muh told The Edge Singapore... [W]hile Bush has often been portrayed as being more pro-market than kerry on trade issues, policy realities under either candidate would probably have been much the same...

The big deal for professional money managers with an eye on regional stock market indices right now is the slowing pace of growth in the US, and the dangers posed by its heavily leveraged public and private sectors. "Corporate earnings look good now, but they are forecast to dip across the world," says Muh. "Global earnings in aggregate have grown between 21% and 24%. Next year, it is forecast to fall to about 12%. But I suspect that number might be revised down further. So, there is a possibility that we will be down to single-digit earnings growth."

That's not to say that we are headed for a global recession, Muh adds... However, there isn't much to buffer the impact of further economic shocks going forward... [T]he US also has a private sector that is pretty much tapped out. "The US is no longer facing a twin deficit, it actually has a triple deficit," says Muh. "Household debt in the US has been increasing over the past decade. And, when you are highly geared and interest rates are going up...you also run the risk of rising servicing costs curtailing your spending..."

"It's very clear that given the triple deficit in the US, something has got to give," says Muh. "The US dollar has quite rightly been weakening... I think it's fair to say that Asian currencies have an upward bias across the board against the US dollar... Stronger currencies, and the belief that it is going to happen, will lead to a lot of capital flow into these countries..."

Against this backdrop, Muh says that Citigroup Asset Management's funds are overweight in Australia, New Zealand and Singapore, which offer a balance of attractive valuations and moderately positive earnings momentum. And, while South Korea has very poor earnings momentum, its valuations are too attractive to ignore...

I agree with Muh that President Bush's re-election is less significant than many analysts and investors think, and that the world economy is headed for a slowdown. I am not so sure, though, about his country picks.

The Australian and New Zealand markets have benefited from the commodity boom of the past few years; many analysts think that commodities are headed for a correction, and that may not be good for these markets. The Singapore economy has recently given indications of a slowdown in its important manufacturing sector, suggesting that its recovery may have peaked.

Having said that, longer-term investors may be willing to ride out the potential slowdown if valuations are attractive enough, as implied by Muh.

For more on my take on President Bush's re-election and the prospects for the world and, in particular, the Singapore economy, see "Bush's election victory cannot blow dark clouds away".

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