The outlook for the US economy continues to be a major concern. The US housing market is weak and some believe it will bring recession. We are on board with the slowdown argument but question whether recession is likely when job creation remains robust and personal income growth continues at a healthy rate.
Other parts of the world have continued to surprise on the upside. Nowhere has done more to brighten the mood than the Euro bloc. The recovery in Europe has reached beyond the export sector to touch the man in the street. Consumption growth has been robust in France and even Germany has seen signs of a greater willingness to spend. It remains to be seen whether that is an inter-temporal transfer of spending as people stock up in advance of the 2007 VAT increase.
Another debating point is whether European economic growth can hold up in the face of slower US growth. The ECB’s optimism on this front in 2001 turned out to be misplaced, but we are inclined to stick our head in the lion’s mouth and say this time it might be different.
The relationship between the US and Europe is highly volatile and there have been periods in the past when slowdown in one bloc has not transmitted through to the other. With consumer spending in Europe recovering after an extended period of slow growth and the corporate sector in rude health, we believe the Euro area is well placed to weather slowing US growth.
There are mixed signals from markets. The sell off in the second quarter hit cyclical areas hard and for the first time in a few years, buyers did not go back to previous winners when prices recovered in Q3. That has caught some managers offside and many face a tough choice between holding on to stocks that no longer appear to be flavour of the month or rotating into the new areas that provided market leadership during Q3. We are inclined to think that new leadership is here to stay – it may be a precondition for continued strength in equity markets.
Bill McQuaker is director of multi-manager at Henderson Global Investors