US
In particular, several corporate announcements dented hopes of a pick up in technology spending, thereby exacerbating weakness in the technology sector.
Analysts are lowering their profit forecast for 2Q 2002 and are now predicting the S&P500 companies to report a 6.6% rise in earnings, down from the original forecast of 7.5%. In the absence of strong profit growth and further accommodative monetary policies in the U.S., a significant market rally is not expected to happen near term notwithstanding the market's current oversold condition and under-valuation relative to bonds. Profit margin might improve towards the latter part of the year, when we see signs of rising efficiency and modest wage claims.
Technically, in the near-term, the Dow is likely to consolidate around the 9000 to 9400 level, ahead of the 2Q corporate result announcement. We would continue to recommend ELN.
Europe
European economic recovery is well underway, which bode well for the long-term prospect of European markets. The European Commission forecasts that the European economy would grow by 1.4% in 2002.
In France, the economy has expanded by 0.4% in 1Q2002 helped by the improvement in the U.S. and European industrial production. Exports rose by 8% and the trade surplus increased to Euro 1.89bn, from Euro308mn in March. The Bank of France had projected GDP growth of 0.6% for 2Q, up from the 0.5% seen in 1Q.
In Germany, the economy grew by 0.2% in 1Q2002, fuelled mostly by exports. The recovery is not broad based and some local companies are scaling back their investments. Consumer price in Germany rose by 1.1%, less than the 1.2% market forecast. The unemployment rate is deteriorating as prolong strikes by construction workers might prompt the employers to fire more workers. The government is under pressure to approve further social welfare spending for 2003, ahead of the national election on Sept 22, 2002.
Worries about interest rate hike appear premature, despite the ECB having raised their inflation outlook for 2002 to as much as 2.5% from 2.1%. The European Central Bank is expected to keep interest rate unchanged, owing to the decline in inflation and strengthening of the euro.
Japan would likely introduce a new package of economic revitalization measures in order to reinforce the economic recovery. The package might include plans for tax reform, industry deregulation, efforts to dispose of non-performing loans, steps to nurture leading businesses and the government's overall plan to maintain fiscal discipline in drawing up the fiscal 2003 budget.
So far, Japanese inventories have been lowered to a manageable level, thanks to the improvement in exports to the U.S. and elsewhere in Asia, and for a broad range of items, ranging from cars to steel to laptops. Household spending in April increased for the first time in three months. The April consumer price index fell at an annual rate of 1.1%, the smallest decline in six months.
However, business capital expenditure is weak and fell by 12.3% in 1Q. Japanese firms have remained burdened with excess capacity. The recovery could be mild, as the banking system is still burdened with its own problems. Bad debt currently accounts for almost 11% of banks' loan portfolio. Major banks are still conservative in loan extension, despite the central bank having been printing money at a startling 36% annualize rate.
Against the background of an improving economy and increased capital inflows, a few prominent investment strategists have raised their recommended exposure to Japan from underweight to neutral. The Finance Ministry in Japan expects a 1.0% GDP growth for 2003 that would largely be export led. Japan is expected to continue to benefit from a major shift in capital flow away from the U.S. In May, overseas investors have diverted USD8.0bn into the Tokyo Stock Exchange. However, in the near-term, earnings recovery is unlikely to be broad-based, but would remain heavily dependent on export momentum.
The U.S. index of leading economic indicators rose twice as much as expected during May
A gauge of manufacturing jumped to a four-year high, easing concern the recovery is flagging. However, despite such signs of a recovery, the equities markets continued to be battered by profit concerns, worries over warnings of terrorist attacks, mistrust of accounting practices and tensions in the Middle East.
Tuesday, June 25 - 2002 at 17:44
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HSBCTuesday, June 25 - 2002 at 17:44 UAE local time (GMT+4)
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This Article was updated on Wednesday, March 28 - 2007
Index : Global Stock Watch
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