An extract of the April 2009 edition of Investment Strategy:
At last, a warmer response to government announcements
Government officials seem to have finally found the right way to “speak to the markets” in March, judging from the 25.7 % surge in the MSCI AC World index from March 9 to April 9. Once again, the United States led the way when the announcement by Treasury Secretary Timothy Geithner was very well received, as was not the case in February. Although this time he did provide more details about the plan to save the US financial system, it was more than anything the general impression he gave that boosted investor morale and sustained the stock market rally. A few days earlier, the Federal Reserve had surprised investors when it took its already highly accommodative monetary policy to a new level by purchasing Treasury securities. The Bank of England had already taken the plunge to purchase gilts and other major central banks have already decided or are considering equivalent measures. Monetary authorities are still as determined as ever to get credit flowing back into the private sector, while government authorities also seem ready to intensify their efforts. Finally, the G20 summit meeting in early April reassured investors by showing that international cooperation would be strengthened. Considering the powers with which the IMF has been vested it certainly does seem able to quickly counter the various risks that could destabilize the emerging economies (ie capital flight, attacks on local currencies and doubts about growing public deficits) and this has reduced the fear of contagion.
Financial system still convalescent
Does this mean we are out of the woods? Of course it doesn’t, and investors are still nervous despite the small decrease in volatility. Their main concern is still whether or not monetary policy measures can be effective with the financial system as dysfunctional as it is. Recent news from banks has been mixed. Although some major banking groups were optimistic about their results in January and February, fears began to mount in March, particularly regarding the recapitalization they could require. Toward the end of the month the US Treasury Secretary stated that some financial institutions could still need a “large” amount of capital. Some observers were disturbed to discover that only $135 billion remained of the $700 billion initially provided for under former Treasury Secretary Hank Paulson’s TARP plan. If the Obama administration has to ask Congress for additional funds this will no doubt be a crucial moment for the Treasury and for the share prices of financial firms.
Still cautious about equities
There are still no clear signs that the economy is stabilising and the steady downward revisions of growth forecasts augur poorly for corporate earnings. No doubt a more positive outlook for equity market fundamentals will be necessary before we see a sustained bull market. We believe that the recent pickup in equity prices is only a temporary bounce, in a market that remains basically bearish or at least shows no convincing signs of reversing. The beginning of the earning season in mid-April and the possible bankruptcy of General Motors could quickly put this technical rebound to rest. In this environment we are maintaining a moderate underweight position.
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“Investment Strategy”sets forth the different asset allocation choices which are implemented in BNP Paribas Asset Management’s portfolios. The investment strategy derives from a running analysis of numerous factors (i.e. the general economic situation, earnings growth rates and financial ratios, assessment of market valuations, technical analysis).