Market views

This section of the site contains an overview of our global investment strategy and a review of recent developments within the major world markets.

The information contained in these pages has been derived from internal sources that we consider to be reasonable and appropriate. It also includes our views and expectations, which cannot be taken as fact.

Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact nor should any reliance be placed on these views when making investment decisions. Past performance is not a guide to future performance.

 Global Investment Strategy - November 2008

 Policy changes over the month, when applicable, are shown by arrows (<<, >>)

Economic growth
Our economic growth forecasts are largely unchanged from a month ago, but recent developments and data suggest that the risks are once again weighted to the downside. There are two big uncertainties: first, the relationship between the stressed financial system and real economic activity around the world; and second, the extent to which the financial stresses will be reduced by the raft of measures announced in recent weeks by governments and monetary authorities. Our central view remains that growth in the main developed nations (the average of the US, UK, continental Europe and Japan) will slow further from 1.3% in 2008 to 0.8% in 2009 before picking up moderately to a 1.7% pace in 2010.

Inflation
The balance of risks to our inflation forecasts has swung from the upside to the downside over the last couple of months. This is a result of weakening economic activity and the dramatic decline in energy and other commodity prices. Developed world headline inflation is expected to average 3.7% this year but should fall back to about 2.3% in 2009 and 1.9% in 2010. The slowdown mainly reflects trends in food and energy prices. Core inflation is forecast to run at about 2.3% in 2008 before slowing to a 2.2% pace during each of 2009 and 2010. Consensus forecasts have stopped rising and may now be starting to fall back.

Interest rates
Severe financial stress and the changing balance of risks to economic growth and inflation have produced a significant change in the stance of central banks, highlighted by the co-ordinated 50 basis point (bp) cuts in the US, UK and euro area (and elsewhere) on 8 October. In the US, the Fed Funds rate has now been cut to 1.5% with a further move down to 1% now looking plausible. We continue to see an upward trend in the US from the third quarter of next year, reaching 4% by end-2010. In the UK, official rate cuts are coming through more quickly than we had expected and we now see a fall to 3.5% rather than 4% by the summer of next year. The expected pace of rate cuts from the European Central Bank has also accelerated and we now see reductions to 3% by mid-2009 rather than early 2010. In Japan, we continue to see the official rate on hold at 0.5% at least until the final quarter of 2009.

Bonds
The prospects for government bond yields are subject to the opposing influences of, on the one hand, a very sharp rise in the likely level of new issuance and, on the other, downside risks to the outlook for economic growth and inflation. Our forecast for the ten-year US Treasury yield in a year’s time is trimmed marginally to 4.7% (from 4.75%), although this is still well above the current level of 3.95%. Our projections of other ten-year yields are unchanged, with the forecast 4.75% in the UK in line with current levels. The 4.25% estimated for German Bunds implies an increase of about 15 basis points, while the 1.80% forecast in Japan indicates an increase of about 20 basis points.

Equities
The lack of positive response to the US government’s support measures is the clearest indication that investors remain resolutely pessimistic. We are now approaching the final and potentially most volatile phase of the bear market. Significant government and central bank responses to rebuild confidence in the financial sector are starting to proliferate around the world, a trend that is likely to gain momentum, especially if equity markets continue to fall. However, the likelihood of a significant bear market rally is now a high probability.