Eugene Kiernan, head of asset allocation, Irish Life Investment Managers
Coming into 2003 our stated view was for a positive out-turn and we look for the same again in 2004. In broad terrms we think that global business activity will continue to pick up in 2004, although the pace of the likely rebound in the second half of 2003 in the US may not be a good guide to global growth levels in 2004.
There are still quite a few excesses to be worked off and, for example, we would see Eurozone growth being around the 2% mark in 2004, still below potential. This better activity will see company cash flows and profits advance further in 2004 and this is the basis for our positive outcome in markets.
Profit forecasts and market expectations have moved from the romantic to the realistic and there are sufficient demands upon company cash to restore balance sheets and to bulk up pension funds and to keep underlying profit growth in the 7-10% mark. A low interest rate environment supports current market multiples but cannot fuel multiple expansion, thus profits growth will again be the driver of markets in 2004.
Markets such as the UK may outpace others next year as it has lagged somewhat this year and offers reasonable relative value against the major markets. NASDAQ will also do reasonably well if the economic recovery gains traction and business investment picks up. Spending on information technology is about half of total business investment.
We see no return to “irrational exuberance” in markets in 2004, but see equities as compelling and delivering returns superior to other asset classes.
Dan McLaughlin
The major equity markets have seen strong gains in recent months and I expeect this to continue. The economic cycle has clearly turned, with growth gaining momentum, led by the US and Japan. This will boost earnings, with companies regaining some pricing power.
Equities are still cheap relative to bonds and expectations about earnings growth are also far more modest than prevalent over the past two years. The world is also awash with liquidity, thanks to the desire of central banks across the globe to avoid deflation at all costs. Excess liquidity has already resulted in strong gains in property and equity prices and this will continue into 2004.
Alan McQuaid
The stock market remains on the verge of an upside breakout, but is being held back by the instability in the bond market. Equities have unwound the overbought conditiions created during the post-Iraq rally, and are primed to move up, aided by better than expected corporate profits.
Corporate profits are the key, and should continue to beat expectations. Importantly, US fiscal and monetary policy remains focused on spurring growth, which is working, and will not shift gears in a meaningful way until at least the Autumn of 2004 (the next Presidential election). The catalyst for a breakout may not arrive until employment data show signs of life, although a modest bond rally would help.
There has been an upward shift in productivity growth in the past decade and this is unambiguously positive for the US economy. Higher productivity is the only way to sustain the combination of low inflation, rising real incomes and increased profit margins. Profit margins have improved significantly in the past two years, despite a tough pricing environment.
Strong productivity explains why profits have been surprising on the upside, and there is a good chance this bullish backdrop will continue in the year ahead and gradually help lift the demand for labour. Investment is reviving and payrolls will be next. Still, the cautious attitude in the corporate sector will prevail, pointing to a gradual revival in job creation, thereby ensuring that corporate profits will be highly leveraged to the economic recovery. |
