While most major world equity markets have recovered from the shock of September 11, the outlook in Asia for the rest of the year is clouded by teetering economies.
Investors, particularly in Asia, are waiting for a recovery in the US economy before committing heavily to the stock market.
David Chapman, senior portfolio manager with financial advisory firm Towry Law says the world has probably seen the worst of the current bear market in equities. "I think it would perhaps be wrong to say we are at the end, but we are cautiously optimistic. Looking ahead, particularly short term, we think markets will remain volatile. They will be trading markets rather than full bull markets, but markets that do allow traders to operate and generate reasonable profits."
Towry Law's relative optimism about the prospects for equity markets is reflected in the attitudes of its clients, Chapman says. "We have just been through a long negative period. People are just beginning now to think about going back into the equity markets." He says equity markets are likely to outperform bond markets for the rest of the year. Bond prices have discounted further interest rate cuts and there are early signs of some interest rate increases around the world, notably in Britain because of buoyant retail sales. "Even small interest rate rises would have a negative impact on bond markets," Chapman says.
Lloyds TSB investment director, Bert Backholer, believes global markets will show an overall rise this year. He views share prices in the US as relatively expensive, but expects a slight rise for the first half of the year. Backholer has reservations on the short-term future of the US economy.
"While the US has bounced back from the traumatic period immediately following the terrorist attacks, the near-term outlook is very uncertain and it is still too early to rule out a deep recession."
Backholder says the current US recession is the result of a collapse in the recent technology-led capital investment boom, and as such it will take some time for imbalances to be corrected. "We still expect an economic recovery to materialise by the second half of 2002, or possibly earlier, aided by an end to destocking and a gradual pick-up in capital investment. Any inflation concerns have been pushed out to 2003, removing fears of large interest rate rises shortly after the recovery begins."
Despite world economies being on the brink of recession, the September 2001 lows in world equity markets are unlikely to be retested, barring another catastrophe, Backholder says.
In Asia, equity valuations have begun to look attractive, he says, although share prices will find it hard to appreciate far without the expected recovery in the US. "Asian markets are reasonably valued, but we would concentrate investment in Northern Asia. The smaller economies remain at risk from heavy indebtedness, currency weakness and religious conflict."
Enzio von Pfeil, chairman and CEO of independent research company Commercial Economics Asia says equities will provide the best investment opportunities among asset classes this year and the clear winners among equity markets would be the US and North-east Asia.
"As a continental European myself, I am deeply sceptical about Europe," says von Pfeil, pictured. "I think one of the biggest dangers facing the world is the expansion of the European Community, because that can only mean higher taxes. Somebody has to finance the growth of this bureaucracy. You will find the monetary policy will remain very fuzzy and that's not going to help the markets a great deal. I think the faith in the euro will continue wilting as indeed it has since it launched. That would suggest, if anything, probably higher European interest rates to defend this currency as opposed to lower interest rates," von Pfeil says.
He expects the US economy to begin its recovery phase in the second half of this year. "I am very positive on the US. We have been saying for some months that things are looking less terrible than many people were suggesting."
Recent US retail sales and other consumer confidence measures have begun to show a recovery in consumption, the result of a sharp increase in the US money supply. "Unless you want to throw out all the economic text books, the reason the money supply has increased strongly is in order to get consumption back on its feet," von Pfeil says.
"We will soon see recovery, stabilisation, and improvement." Based on recent indicators, the US economy will probably begin to recover in the second half, he says. In North Asia, von Pfeil particularly likes the Taiwanese equity market, which he expects to benefit from an effective government and membership of the World Trade Organisation. He says Taiwan has some chance to be "this year's South Korea" in terms of equity market performance.