Not a good time for US equities

USA

Growing concerns that the U.S. economy might experience a double dip recession has for the time being put the bullish sentiment amongst U.S. investors in check. The oil price has risen 31% year-to-date, result of uncertainties associated with the political turmoil in the Middle East and Venezuela.

According to First Call, earnings for the S&P 500 companies has fallen by 11.6% in 1Q 2002 and were worse than expected. Major blue chips such as Intel, Exxon Mobil, DuPont, and WorldCom reported weaker than expected earnings.

In the absence of consumer demand, the U.S. economy is not accelerating soon enough to boost demand and stock prices. On the positive side, the pressure for an interest rate hike has waned, and investors are not expecting the Fed to raise rates until later in the year.

The telecommunication services index of the S&P 500 has fallen to its lowest point since 1996. Microsoft fell as it gave profit warnings. WordCom and Ericsson have lowered their sales forecast, suggesting that weakness in the telephone and computer-related businesses might extend for an additional quarter.

Weakness in share price of telecom and computer stocks could restrain the S&P 500 rise, as they account for roughly 20% of the index..


Europe

Estimating that the region could grow by 2.0 - 2.5% in 2002, the ECB is confident the Euro zone economy is on a recovery track.

Germany saw growing evidence of a recovery as the European Commission expects the German economy to grow by 0.8% and 2.7% in 2002 and 2003 respectively. The number of unemployed improved by 8,000 in March, the first decrease in 15 months.

In France, ahead of the second round of presidential election on May 5, investors are expected to remain on the sideline. The worst scenario is one whereby no party is capable of winning a majority in the parliament. It is expected that Chirac will propose to cut corporate tax rate and payroll taxes, which are positive for economic growth.

In the UK the business sentiment index improved from -31 to 21 QOQ, raising expectation of a recovery in coming months. Cyclical plays like electronics, auto, financials and engineering have performed strongly, having been underpinned by the U.S. recovery.

The Bank of England is not under much pressure to raise rates. The government plans to raise taxes by GDP22 billion, which coupled with higher oil prices and sluggish business investment, could slowdown growth in the months ahead.

Japan

In Japan, the consumer confidence index rose from 36.9% to 38.4% in 1Q. Confidence in job prospects rose from a record low of 19.8 to 24.8 for the same period. The market is gaining strength. Strength in the stock market is expected on evidences of successful cost cutting as found in FY01 corporate results.

Canon rallied to a 10-month high, after the nation's largest office equipment maker reported stronger than expected 1Q profit achieved on the back of higher sales of digital camera and the weaker yen. NEC, the country's second-largest chipmaker is expected to return to profit this fiscal year, as job reduction should help lower operating cost.

Overall, we believe the worst could probably be over for Japan. Investor's confidence could improve on the back of corporate earnings recovery. Meanwhile, domestic production has almost stopped falling, thanks to progress in inventory adjustment and the recovery in exports.

According to METI's survey, industrial production is expected to grow by 1.0% in March and 0.2% in April. Legislators are thinking of lowering corporate tax rate to fasten the pace of recovery.