US markets to ride see-saw for another five years

The US economy is facing another five years of see-sawing economic activity, although the outcome of the Iraq crisis will have some impact on future trends, says Daniel Fuss, the vice-chairman of US fund manager Loomis Sayles.

“Our (US) economy is weak and the see-saw recovery will continue until corporate spending starts to happen again,” he says.

“But I am also worried about how things will play out with Iraq. This administration is determined about a solution to Iraq and we predict something happening in November, 2003 when we may see military action.”

Fuss says the current economic outlook in the US and Europe is comparable to that of the early sixties when corporate spending was low and government spending high. In 1962 there was also a similar threat of war with the Cuban missile crisis.

“We are seeing a dramatic change with government spending rising fast, especially towards the military, and corporate activity falling,” he says.

“This is reflected in the bond markets, with more Treasury bonds becoming available and less corporate bonds.”

However, the dour US economic scenario is not occurring in Asia which is growing strongly, based on global consumer consumption.

“This means we are building for recovery and worldwide inflation driven by goods,” Fuss says.

“Added to US employment needs, this means the Treasury can’t tighten rates, in fact it may ease them, and inflation will go unchecked.”

Investors are facing a difficult time to achieve positive results as an outcome of these factors influencing markets, Fuss says.

Fuss is seeing strong demand for Treasury bonds and, as a result, yields have gone through the floor, he says.

“Loomis Sayles is moving away from Treasury bonds as we think they are overpriced,” he says.

“We are moving into corporate bonds, which we think are fairly valued.”

Fuss argues there is now some value to be found in technology, power generation and telecommunications stocks, but investors need to tread warily.

“There has been massive over-supply in these sectors, but demand is still rising,” he says.

“The demand for technology is still growing and power generation has seen rationalisation, but the demand is still there.”

It is a similar situation with telecommunications and, as a result, the stocks are cheap and worth revisiting.

“The opportunities are there but technology is the most dangerous and investors need to look carefully,” Fuss says.

“If the company is generating cash in this economic environment, it is likely to be among the survivors.”