• We are closely monitoring disposable income levels and consumer spending in the US, key indicators of recovery
Seung Minn, CIO and Senior Portfolio Manager of the Allianz RCM US Equity fund, gives his outlook for the US economy, and expectations going forward.
Company earnings better than expected
“The first quarter’s company earnings announcements look more promising than many expected. At the end of March, most earnings in Q1 2009 had been announced, with earnings coming down by approximately 30% this quarter for S&P companies. At the same time, the Financials sector has actually been doing relatively well, stabilising together with other sectors.”
“A lot of investors are questioning the sustainability of these results for Financials, with a big surprise coming from trading for big banks. However, one positive signal is that mortgage activities have actually picked up quite significantly for the Bank of America and Wells Fargo, so this is a sign that there is a fair amount of activity going on below the surface, which we believe is a positive signal.”
The outlook for 2009
“With government support and a boost to investor confidence, we might be looking at a very positive remainder of 2009. While we are reluctant to call the market going forward, we are increasingly confident that the S&P 500 may produce a positive return for the whole year, although we expect the current level of volatility to continue. We may well experience downwards trends in the market in certain months and even quarters, but for the year as a whole it is not impossible, given current situations, that we will see a positive overall return.”
A bear market rally market?
“The majority believe that the recent rally has been a bear market rally and that it’s not really a recapitulation of sentiment or investors actually switching their asset allocation aggressively back into equities. From a macroeconomic perspective, we will be carefully monitoring trends such as the stabilisation of certain consumption items related to disposable income spending. We would like to see this slowing down, if not turning positive for certain areas of discretionary spending. That will give us more confidence in investing in certain stocks, especially in discretionary sector stocks which, we have been avoiding for one or two years.“
“Given the stimulus spending package and low mortgage rates, the housing market seems to be seeing some recovery. What we would be most concerned about is if the housing market continues to go down. If we don’t see disposable income spending going back up and if we see further housing market deterioration, we could be looking at sustained volatility and a potentially longer bear market going forward.”
“As far as consumption is concerned, besides the equity market itself we know that the long term consumption trend does not reverse itself that quickly. Usually it’s a minimum three-year trend, and it goes down for a while before it slowly recovers. So if you look at the actual data, consumption is even slower. It’s like a supertanker trying to turn and takes a long time.”
“Now the US stock market is obviously is a lot more volatile and can turn really quickly. However, if you look at long-term trends there are different schools of thought as to how long the bear market has been running. From those that say it has only been a year and a half, or even a year, to others that think that the bear market started when the internet bubble popped in mid 2000. However, the volatile nature of the equity market means that the best thing to do is to be a long-term investor, looking for more of a dollar cost averaging type of asset allocation than looking for the perfect moment to making big shifts in asset location, which are extremely hard to time.”
