Swing high, sweet indices?

As the Rugby World Cup fast approaches, Santander Asset Management looks at the prospects for the investment markets of the participants.

Home countries (England, Wales, Scotland)

Richard Moore, UK Equity Fund Manager, Santander Asset Management UK says: “We expect the current market volatility to continue, at least in the short term, as fears of further undisclosed bad debts arise. In addition, investors will remain cautious over the extent of any economic downturn that may result from tighter lending criteria. While we do not expect this to be severe, we do expect this uncertainty to restrain the market going forward. However, such volatility could open up opportunities on a longer-term basis as the UK remains very attractively valued.”

Europe Excluding UK (France, Ireland, Portugal, Italy)

Ana Rivero, Head of Strategy, Santander Asset Management, says: “Europe is now facing a two-sided coin: economic growth is sound and above average, mainly on the back of exports growth, however the fear of inflation that has driven European Central Bank rate increases (and may still be in place) could be a drag for still weak private consumption recovery. Current development in the US housing markets and the turmoil in financial markets may have an effect on monetary policy, but the likelihood is that the ECB will resume hiking any time soon. We then have to trust in the economic momentum built last year, with ‘core’ countries such as France facing some interesting reforms, while others like Ireland still have the possibility of well above average growth.

Emerging Europe (Romania, Georgia)

Ana Rivero says: “The Romanian economy is overheating. GDP growth prospects at 6.5 per cent this year are being fuelled by an explosion in private credit sector growth by more than 46 per cent, and some imbalances are set to widen given the lack of major economic reforms. Romania could well be chased by Georgia as the latter has managed to grow above 7 per cent GDP this year, in the midst of structural reforms that have reduced the government debt burden and supported moderate fiscal deficits.

North America (USA, Canada)

Ana Rivero says: “The Canadian economy is vibrant, with GDP growing at a 3.4 per cent and beating analysts’ expectations. Nevertheless, inflation is above the 2 per cent targeted rate and a rate rise would be likely if it wasn’t for the turmoil in financial markets. In the US, the housing market crisis threatening real investment and thus, GDP growth. Our bet is for a 2 per cent GDP growth this year and moderate rate cuts from the Fed in order to restore confidence and permit a recovery in 2008. As long as employment is not dampened, we believe this crisis will not erase private consumption deep enough to make us change our economic scenario.”

Japan

Ana Rivero says: “Showing eternal promise for a long time now, Japan could still surprise on the upside, even if it comes from a period of uncertainty, and we are having a hard job sticking to the reflation story that is yet deemed to prove right,Consumer spending remains weak, despite the tightening labour market, as wage growth is yet to pick up. Japan has a good set of fundamental opportunities to resurface as a growing nation, but the time is ripe to show some delivery. We will maintain our focus in private consumption, and watch closely any BoJ action, as well as any measure taken by Mr Abe’s cabinet.”

Latin America (Argentina)

Ana Rivero says: “Argentina is facing a lack of institutional credibility concerning the economic data released. President Kirchner even had to fire some officials in charge of the CPI calculations amid growing protests from unions and economic agencies claiming actual inflation would nearly double official figures, which stand at 8.6 per cent. Industrial output is suffering from the energy shortages that have forced industries to cut working hours, and economic activity has slowed to 8.3 per cent. Argentina has recently announced a ban against Chinese imports such as toys or textiles, in order to enhance production from the country.”

Asia Pacific excluding Japan (Australia, New Zealand, Samoa, Fiji, Tonga)

Ana Rivero says: “In New Zealand, the continued increase in export prices, mainly driven by higher commodity prices and the surge in the NZ Dollar, has caused several rate increases this year, driving the official cash rate up to 8.25 per cent. GDP growth will top 2.6 per cent this year, up from one per cent last year. Next year, we should see some rate cuts aimed to encourage spending, once inflation has stabilised within the official two per cent range. Australia, on the other hand, seems to continue its expansion on the back of the global commodity boom and has benefited from the passive and exceptional upgrade in terms of trade. The expected downturn in export growth is due to be compensated by renewed investment plans that should keep the economy growing above three per cent this year and next.”

Emerging Markets (South Africa, Namibia)

Ana Rivero says: “Currently growing at a 4.6 per cent rate, the South African economy is suffering from high levels of inflation, and prices could well be above seven per cent by the end of the year. Thus, the central bank has raised the official rate up to 10.5 per cent, creating deteriorating credit conditions. Food CPI is growing by 10 per cent and given the actual developments in agricultural markets it seems quite difficult to predict any reduction in prices for the months coming.”