"Europe is the weakest link in the world economy", says Robeco's Chief Strategist Jaap van Duijn, at his press conference on the market climate in 2004. The real problems in Europe are structural, being the low growth of the working population and the relatively low participation of immigrants in the labor market. Europeans do not work as long as Asians and Americans do. In Europe, seniors participate too little in the labor process. On top of this, the quality of education is lagging well behind.
The US is the leader in technological innovation. China has now become the new production center for the world economy. Japan is benefiting from China's strength. Europe, continental Europe in particular, is lagging, although it will catch up in business-cycle terms. Europe is showing its usual six-month delayed reaction to the recovery of the US economy. The European economies should have seen the worst by now. Growth here is more likely to be better than expected, rather than worse.
The recession is over
Officially, the recession in the US already ended in November 2001. However, the 'real' bottom was reached somewhere around April 2003, after the attack on Iraq. An unprecedented degree of accommodation from monetary and budgetary policies caused the US recession to be very mild. The European economies probably bottomed in the third quarter. All signals are clear in the US. Consumer confidence has increased, and the production sector (the ISM Index) is showing a powerful recovery. Earnings also boomed in 2003. Investment rose and unemployment fell. US government policy remained strongly supportive, as President George W. Bush has set his mind on re-election. This year too US consumers will continue to benefit from tax cuts. Fed chairman Alan Greenspan has announced that short-term interest rates will remain low for the time being.
The two deficits are the other side of the coin
Due to ongoing strong growth in the US and low growth elsewhere, the trade deficit has reached a new record. Tax cuts, the war against terrorism and the recession have pumped up the budget deficit. The imbalances of the twin deficits pose the largest threat to global recovery. Expectations are that the US dollar will depreciate further in 2004.
Will 2004 be a good year for stock markets?
The economic recovery will continue. Inflation is low for the time being, due to rising productivity and wage restraint. Corporate profits will increase further, and monetary tightening is not expected for quite a while yet. However, the economy and the stock markets do not always show a similar development. The recovery of 2004 was already anticipated in 2003. As a result, P/E ratios have already increased in several sectors. The prospect of something happening is often better than its actual occurrence! Terrorism and the situation in the Middle East are still threats, however.
The laggards of 2003 may perform better in 2004. In terms of valuation, Europe is more attractive. Japan is probably reviving. Stocks of producers have become more attractive than consumer stocks such as IT and consumer discretionary. Blue chips will do better than low-quality names.
Bond yields to move sideways
Everybody expects bond yields to go up, but why should they? The global economy is picking up, but deflation is still limited. Only commodity prices are surging. A rise in short-term interest rates does not necessarily lead to higher bond yields. A sideways movement is more likely for bonds.
Next big recession at the end of this decade
The outlook for the coming years is rather good. The next big recession will not be until the end of this decade. The Digital Revolution will generate high productivity growth in the next few years. Inflation will not be a problem in the next two years. The themes for this decade will be: emerging markets with high earnings growth, which are still cheap, demand for commodities, such as gold, oil, copper, etc., China's explosive growth with accompanying periods of overheating, and the aging of the population, which will have a large impact on sectors such as health care and financials.
About Robeco
Robeco provides discretionary asset management products and services, as well as a complete range of mutual funds to a large number of institutional and retail clients worldwide. Robeco's product range encompasses fixed-income and equity investments, as well as balanced accounts, money-market funds and alternative investments.
Robeco distributes its funds for the retail market directly, and through other financial institutions. Several of its mutual funds, including the flagship Robeco N.V., are listed on major European stock exchanges such as Amsterdam, Paris, Frankfurt and London.
As well as from its head office in Rotterdam, Robeco services its clients from its European offices in Belgium, France, Luxembourg, Switzerland, Germany and Spain. In the United States, Robeco has offices in New York, Chicago and San Francisco (Weiss, Peck & Greer), Boston (Boston Partners), White Plains (Sage Capital Management) and Toledo (Harbor Capital Advisors).
Robeco is the center for asset management with full operational independence within the Rabobank Group. The combination of the highest credit ratings from the major international rating agencies and the highest Sustainability Cluster Score within the banking sector reflects the high added value Rabobank has always offered its investors, members, clients and employees.