Capital Market Outlook for 2004

As year end passes, we can reflect back on a tumultuous year, fraught with war, politics, more business malfeasance, and further prosecution of fraudulent businessman (and a particular business woman). Equally so, we can reflect on some very positive economic accomplishments, one where the USA has once again led in economic stimulation and growth, and where stock markets have delivered stellar results for those courageous enough to have invested. Tax incentive plans, strong fiscal and monetary policies, a weaker US Dollar and strong consumer spending all supported a global recovery from one of (and by some measures) the worst bear market in history. Although not all the major economies are yet stable in economic growth, the leaders (USA & UK) are showing very strong signs and knowing that efficient markets must lead economic indicators, all signs show we are moving into the next global economic growth cycle. With that news now behind us, it is important to move forward with a clear mind about what is likely to happen in 2004 and not base our investment decisions in what is now history.

During 2002, we encouraged investors to watch for the typical yearly weakness in the third quarter and move to an overweight in equities, away from defensive assets such as Treasuries. During the Iraq war conflict, we demonstrated through historical data how the war would likely be short and ultimately result in positive economic growth, also recommending to investors to take advantage of the emotional situation and good equity prices to buy in further. Both recommendation proved to be absolutely right on. From one month after the Iraq war started until now, the equity markets have never looked back, marching more or less steadily forward in growth and positive news, be it economic or revenue/sales. Although economic data has been somewhat uncertain, and the failure of industry to develop more jobs left further uncertainty, the truth is, looking forward is always difficult and will always be uncertain. With 2/3’s of GDP growth vested in consumer attitude and spending habits, it really the people that decide the future by committing to it.

If one conclusion can be drawn at this point, it must be that pressure from the strong cash positions has forced a return to confidence in investment and business decision-making. We expect that the reemergence of job growth and a mix of stimulative fiscal and monetary policy will allow the US economy to expand by at least 4 ? percent with an 2 - 2 ? percent inflation rate. We believe that similar numbers as the US will occur for the UK with the Euro zone somewhat weaker. Economically sensitive assets including equities, high yield debt, and convertible debt should outperform Treasuries in this environment. We also believe that high growth industries, such as technology and health care, will return to sector growth rates of about twice GDP, opening the door once again to enhanced performance in these sectors. Let us hope that reasoned investment and pricing will offer greater stability this time around. By contrast, accelerating growth increases the possibility of loss for longer dated government bonds (long term debt instruments). The recovery that technically began in September 2002 and accelerated throughout 2003, is likely to prove sustainable through 2004 and beyond. According to a recent survey published by the Philadelphia Federal Reserve, economists are again raising their estimates for growth next year and analysts are similarly raising 2004 profit forecasts.

Ample liquidity, supportive monetary and fiscal policy, an improving business climate, lowered risk aversion and access to inexpensive capital are all potential sources of upside surprises in 2004. For example, business capital spending which had reached trough levels and should accelerate given that there is in the USA alone, $810 billion in corporate cash balances and $300 billion in “free cash flow” is available to fund future capital investment. I.E., it is likely business to business pending will increase with some itchy fingers on the bank balances and the current positive trend in economic sentiment. We expect real estate to continue to accelerate, especially on the home front here in TT as investors demonstrate a natural bias away from the past bear market failures to something new, but not necessarily better. Much real estate pricing is already too high, but if people are prepared to pay.... Also, we redirect investors to the non major economies, the emerging markets, which clearly need to catch back up and whose economies can delivery higher GDP numbers and thus industry growth in revenue/sales figures.In closing, we at Investments International would like to wish all our clients and readers a Very Happy and Prosperous New Year.
For more information on investments strategies or global economic data, see our web site at www.investments-intl.com.  Or, call me at 633-7116 or email darcy@investments-intl.com for more information or to get our current recommendations on equity investment products.

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