Economies stay hot but investor sentiment turning down
Recent indicators show that economies are still relatively hot, but not investor sentiment.
For March, the Labor Department reported this week that US producer prices rose 0.7 percent from February while consumer prices rose 0.6 percent. Energy prices were largely responsible for the large increases. Core prices excluding food and energy rose at a slower pace -- core producer prices were up only 0.1 percent in March, although core consumer prices were still up a relatively high 0.4 percent.
The Beige Book report by the Federal Reserve on 20 April alludes to similar inflationary tendencies: "Price pressures have intensified in a number of Districts, and most report that high or rising energy prices are a concern across sectors."
Other parts of the report show that the US economy remains strong. Business activity reportedly "continued to expand from late February through early April". More than half of the Districts reported that retail activity was up. Manufacturing activity was described as "ahead of year-earlier or previously-reported levels". The report also noted that in general, "firms in the service sector enjoyed a moderate increase in activity". In real estate, residential real estate markets was reported to be "strong across most of the country, while commercial real estate conditions varied". It also reported that for most Districts reporting on financial services, "demand for loans increased across a range of categories" and other banking indicators "were holding steady or improving in some cases".
On 18 April, though, the Commerce Department did report a large 17.6 percent fall in housing starts in March. Some analysts, though, point out that this figure is volatile and, in any case, the number of starts remains at a high level.
If the US -- one engine of global economic growth -- remains hot, the other -- China -- is no less so.
On 20 April, the National Bureau of Statistics announced that China's economy grew 9.5 percent in the first quarter of 2005, the same rate as for all of 2004. Fixed asset investment increased 22.8 percent in the first quarter, just slightly slower than the 25.8 percent growth rate for 2004.
These figures add to the likelihood of further tightening in both the US and China. And this is surely on the minds of investors.
In my previous commentary, "Analysts slightly bearish towards equities", I had highlighted a number of bearish views. Here is more.
On 19 April, Bloomberg columnist Chet Currier wrote an article entitled "Weitz, Dodge, FPA -- Scary How Wary Top Funds Are". In it, he wrote: "One striking aspect of the recent decline in stock prices is how many top-performing fund managers saw trouble coming."
Currier quotes Wally Weitz of Weitz Value Fund and Weitz Partners Value Fund as saying: "Almost everything looks expensive." And Dodge & Cox Stock Fund chairman Harry Hagey and president John Gunn was quoted as writing in their annual report: "Looking out over a three- to five-year period, we continue to believe that returns from the broad equity market will be modest and could be punctuated by some unpleasant negative contractions." And FPA Capital Fund manager Bob Rodriguez was quoted as saying: "Both in bonds and equities, we are taking extraordinary measures to protect capital, since we believe we are in a period of diminished investment returns."
Consensus, you say? Contrary action indicated?
Not necessarily. Remember that these are top-performing funds. According to Currier, the Weitz Value Fund returned 16.7 percent a year over the past 10 years, the Weitz Partners Value Fund returned 16.6 percent, the Dodge & Cox Stock Fund returned 15.8 percent and the FPA Capital Fund returned 17 percent. For comparison, the Standard & Poor's 500 Index returned 10.8 percent a year over the same period.
Merill Lynch has found similar pessimism as well. In its recent survey of global fund managers, it found increasing pessimism about economic growth, corporate profits and prospects for equities.
Whereas in March, a net 11 per cent of managers expected the global economy to grow in the next 12 months, the latest survey found a net 20 per cent expect it to slow. 52 per cent of respondents expected the outlook for corporate profits to deteriorate over the next 12 months, compared to 39 percent in March. 30 per cent predicted margins will shrink, compared to 18 percent last month.
59 per cent of managers said they were overweight in equities, down from 68 per cent in March. 65 per cent were underweight in bonds, the same as last month.
Recently, global equity markets have been making relatively large moves, mostly on the downside. Yesterday, for example, the Standard & Poor's 500 fell 1.3 percent.
The on-going global equity bull market has been resilient so far, and fund managers have only gradually trimmed their long exposure to the market. Let us see whether things will change from here on.
For March, the Labor Department reported this week that US producer prices rose 0.7 percent from February while consumer prices rose 0.6 percent. Energy prices were largely responsible for the large increases. Core prices excluding food and energy rose at a slower pace -- core producer prices were up only 0.1 percent in March, although core consumer prices were still up a relatively high 0.4 percent.
The Beige Book report by the Federal Reserve on 20 April alludes to similar inflationary tendencies: "Price pressures have intensified in a number of Districts, and most report that high or rising energy prices are a concern across sectors."
Other parts of the report show that the US economy remains strong. Business activity reportedly "continued to expand from late February through early April". More than half of the Districts reported that retail activity was up. Manufacturing activity was described as "ahead of year-earlier or previously-reported levels". The report also noted that in general, "firms in the service sector enjoyed a moderate increase in activity". In real estate, residential real estate markets was reported to be "strong across most of the country, while commercial real estate conditions varied". It also reported that for most Districts reporting on financial services, "demand for loans increased across a range of categories" and other banking indicators "were holding steady or improving in some cases".
On 18 April, though, the Commerce Department did report a large 17.6 percent fall in housing starts in March. Some analysts, though, point out that this figure is volatile and, in any case, the number of starts remains at a high level.
If the US -- one engine of global economic growth -- remains hot, the other -- China -- is no less so.
On 20 April, the National Bureau of Statistics announced that China's economy grew 9.5 percent in the first quarter of 2005, the same rate as for all of 2004. Fixed asset investment increased 22.8 percent in the first quarter, just slightly slower than the 25.8 percent growth rate for 2004.
These figures add to the likelihood of further tightening in both the US and China. And this is surely on the minds of investors.
In my previous commentary, "Analysts slightly bearish towards equities", I had highlighted a number of bearish views. Here is more.
On 19 April, Bloomberg columnist Chet Currier wrote an article entitled "Weitz, Dodge, FPA -- Scary How Wary Top Funds Are". In it, he wrote: "One striking aspect of the recent decline in stock prices is how many top-performing fund managers saw trouble coming."
Currier quotes Wally Weitz of Weitz Value Fund and Weitz Partners Value Fund as saying: "Almost everything looks expensive." And Dodge & Cox Stock Fund chairman Harry Hagey and president John Gunn was quoted as writing in their annual report: "Looking out over a three- to five-year period, we continue to believe that returns from the broad equity market will be modest and could be punctuated by some unpleasant negative contractions." And FPA Capital Fund manager Bob Rodriguez was quoted as saying: "Both in bonds and equities, we are taking extraordinary measures to protect capital, since we believe we are in a period of diminished investment returns."
Consensus, you say? Contrary action indicated?
Not necessarily. Remember that these are top-performing funds. According to Currier, the Weitz Value Fund returned 16.7 percent a year over the past 10 years, the Weitz Partners Value Fund returned 16.6 percent, the Dodge & Cox Stock Fund returned 15.8 percent and the FPA Capital Fund returned 17 percent. For comparison, the Standard & Poor's 500 Index returned 10.8 percent a year over the same period.
Merill Lynch has found similar pessimism as well. In its recent survey of global fund managers, it found increasing pessimism about economic growth, corporate profits and prospects for equities.
Whereas in March, a net 11 per cent of managers expected the global economy to grow in the next 12 months, the latest survey found a net 20 per cent expect it to slow. 52 per cent of respondents expected the outlook for corporate profits to deteriorate over the next 12 months, compared to 39 percent in March. 30 per cent predicted margins will shrink, compared to 18 percent last month.
59 per cent of managers said they were overweight in equities, down from 68 per cent in March. 65 per cent were underweight in bonds, the same as last month.
Recently, global equity markets have been making relatively large moves, mostly on the downside. Yesterday, for example, the Standard & Poor's 500 fell 1.3 percent.
The on-going global equity bull market has been resilient so far, and fund managers have only gradually trimmed their long exposure to the market. Let us see whether things will change from here on.
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