Global growth defies the sluggish US housing market

Investors have put the spotlight on the US economy as it undergoes a mid-cycle slowdown driven by housing-related weakness. However, that is not driving a slowdown in global activity, according to Tim Rees, UK equities portfolio manager for Clerical Medical.

Mr Rees said, at a global level, the expectation for 2007 company earnings growth was a robust 8%.

"Earnings growth is expected to be weaker in the first and second quarters before accelerating in the second half. This should continue to drive positive income streams in the form of dividends for investors.

"Over the shorter term, the markets staged a rally in March after the Chinese market fell almost 10% in one day at the end of February. The FTSE All Share returned 3.0% compared with an historical average of 0.9% for March. UK companies are still generating healthy profits and UK shares are good value."

UK Equities

Mr Rees said the UK equity market continued to offer attraction relative to other domestic assets.

"It is heavily influenced by raw materials and these stocks have experienced significant fluctuations in recent months. However, its growth prospects remain solid and valuations are less challenging given the large component of overseas earnings."

Euro Zone

Mr Rees said:

" Economic growth in Europe remains strong. The strength of the corporate sector has fed through to household consumption via an improving labour market and this trend looks set to continue. We expect the ECB to raise interest rates to 4.0% this year before pausing to assess the impact of earlier increases.

"The favourable economic environment should continue to support the region’s equity markets. However, the gearing of European equities to the global economic cycle could leave them at risk should the weakness in the US economy broaden" .

Japan

David Marchant, global equities portfolio manager for Clerical Medical, said Japan is emerging from fifteen years of deflation, full time employment is rising and companies are once again having the confidence to invest in new plant and equipment.

"A key concern for markets globally is whether rising domestic interest rates leads to the Yen strengthening from historic low levels (in real terms). This may lead to an unwind of the Yen "carry trade" , where investors borrow the Yen at low interest rates to invest in assets elsewhere. Many believe that has sustained global market strength in recent years and upward pressure on Japanese interest rates could quell this trend."