Money
Issue No. 7 - October/November 2002
US Economy the Key
by Tony Catt
Recent economic data from the US suggests a more muted recovery than previously envisioned. The US business sector is expected to remain cautious for some time, given recent significant equity market losses, disappointing manufacturing and payroll data and lower than expected June quarter GDP growth of 1.1% pa. Accordingly, our estimate for 2H02 GDP growth in the US has been revised down to 2.75% from 4.0%.
In terms of monetary policy, previous estimates for the Fed to lift interest rates in early 2003 have now been extended to the end of the third quarter on growing concerns regarding the possibility of a “double-dip” recession in the US. However, these sentiments appear to ignore the abnormally low level of US inventories, which have the potential to give a kick-start to the US economy.
Domestically, we believe the current 4.0% GDP forecast for calendar 2002, is achievable. However, we highlight several risks to this 4.0% GDP growth in 2003, which include lower global economic growth, the El Nino-induced drought and the failure of business spending to take up the slack from an expected housing industry downturn. The wealth effects of lower share prices are considered minimal in Australia as direct equity investment represents only 7.0% of household assets. By far, the largest component is housing, which accounts for 62% of household wealth, with dwelling prices gaining 17% over the past year.
Strategy
Australian equities currently appear to have a significantly lower risk profile than global equities. While Australia may underperform in a recovery rally, it offers attractive returns on a 12-month horizon. In particular, in contrast to US equities, valuations appear cheaper, earnings more transparent, and the structural supply/demand environment is in much better shape.
Reversion to the Mean
The world stockmarket boom from 1994 to 2000 saw a dramatic expansion of Price/Earnings multiples (P/E&#...
