US to lead global returns lower

By Michael Bailey

US economic growth could be as low as 1 per cent in 2005, leading global markets to suffer as the world’s largest economy enters “the first phase of a painful decline”, according to a forecast from HFA investment strategist Jonathan Pain.

While consensus forecasts for US GDP growth this year are in the 3.2 to 4.2 percentage range, Pain predicted that interest rates and government spending, massively stimulatory since 2001, will contract more quickly than many are anticipating.

“Interest rates are rising and will reach 3 to 3.5 per cent by the third quarter. Fiscal stimulus is similarly reversing and the consumer simply cannot continue to use their homes as glorified bank ATMs.

“The current account deficit (over US$600 billion) will also act as a drag on growth. All in all the ‘mother of all stimulations’ looks set to become the ‘mother of all slowdowns’,” Pain said.

Meanwhile, two of Australia’s largest fund managers have revealed nearly opposite views on the attractiveness of Australian equities in 2005.

Deutsche Asset Management (DeAM) is keeping overweight domestic shares and listed property trusts in its balanced funds, forecasting an 8.5 per cent return — including dividends — for 2005, which is double its prediction for international equities.

Perpetual Investments, meanwhile, will pare back a 50 per cent weighting to Australian shares to 40 per cent over the year, with chief investment officer Emilio Gonzales citing the “earnings pressure” that local companies will face, and their high valuations after 2004’s rally.

However, the money will be redirected to cash rather than bonds with both Perpetual and DeAM stating that low bond yields relative to cash returns make fixed interest unattractive at the moment.