US economy update
Russell Investments’ chief US investment strategist, Ernie Ankrim, has forecast continuing uncertainty and tight conditions in the US economy for the remainder of 2008.
Ankrim said that while the final quarters of 2008 are likely to contain more surprises, “risk should begin to be rewarded as the remainder of the year rolls out”.
In relation to the outcome of the sub-prime crisis, Ankrim said while “stresses continue on financial institutions’ balance sheets and in housing finance É some transactions are taking place”.
While earlier in the year Ankrim had said “optimistic outlooks for the economy in 2009 should É cause equity returns to approach the mid-to-upper teens”, his mid-year forecast is not so rosy.
“Consumer confidence is weak and demand for investment safety reigns; however, there are still six months left.”
In the US equity market, Ankrim expected large, internationally diversified companies to outperform their “smaller, domestically oriented siblings”. However, small caps have since won as a result of the US Federal Reserve’s Bear Stearns intervention, “mainly because the financial stress being felt has been harsher in large caps than small caps in the financial sectors”.
In relation to the US housing sector, Ankrim said the S&P/Case-Shiller Home Price Index year-to-date numbers to April have declined, supporting his earlier forecast that home prices in the US showed no signs of rising. And while the S&P Homebuilders Index was down 25 per cent year to date at June 30, Ankrim believes this volatile sector “could still end the year much higher”.
In relation to commodities, Ankrim said the current high oil prices “cannot be explained by supply and demand dynamics”, and seem “suspiciously similar to the underweighting then overweighting of technology stock, REITs [real estate investment trusts] and offshore equities over the last 20 years”.
“Investors need to stay diversified and avoid the temptation to react to short-term market volatility,” he said.
Ankrim advises that “patience and investment discipline” are the most valuable investor attitudes in the current environment.
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