Global Investments
International Limited

GLOBAL WORLD MARKET VIEWS SUMMARY
MAY 2002

Global Investment Strategy
The new uncertain environment and the increased geopolitical risk in the world has hit equity markets and has resulted in lower valuations, as investors require higher returns. Over the course of the last month, we have completed the reduction of the overweight stance in the Japanese market to neutral, taking our asset allocation stance in equities to modestly underweight. Overall, valuations remain neutral at best, with over-priced equities in the US largely offset by more reasonable valuations in Japan. Global economic growth is developing considerable momentum and we expect it to accelerate to above trend in 2003. Our global growth forecast has been raised from 2.6% to 2.9% this year, with the figure for 2003 revised from 4% to 4.1%. However, higher oil prices increase the risk of some temporary slowing of growth over the next few months.

UK
The final estimate of fourth quarter GDP offered some new insights into sector balances. For instance, upward revisions to previous savings ratio estimates imply household finances are in a better state than previously supposed. The corporate sector, however, has made little progress in reducing its financial deficit. After the jump in January inflation, February annual RPIX fell back to 2.2%, with a strong deflationary effect from clothing and footwear. Equities responded to higher global growth forecasts and rallied by 3.7% in March. Gilt yields rose across all maturities but the curve flattened somewhat, with 2-year yields rising 47 basis points (bp) and 10-year yields rising 30 bp. Interest rates were once again held at 4% in April. Minutes of the March monetary policy committee meeting showed all members voted to leave rates unchanged.

GDP growth is forecast to slow from 2.2% in 2001 to 1.7% this year, before accelerating to 2.5% in 2003. Inflation now looks likely to run close to the 2.5% target over the next two years. Base rates are forecast to firm modestly from the current 4% to 4.75% by the end of 2002 and to 5% by the middle of 2003.

On a 12-month view, 10-year gilts are forecast at 5.2%, or changed very little from current levels. Some further disinversion at the long-end is likely to see 30-year yields edge up slightly, from 4.95% to 5%. The UK equity market remains attractively valued compared to US equities and bonds. However, in the short-term we expect the market to trade in a range (4,800 to 5,500 on the FTSE 100), with the rise to 5,600 expected to take place towards the end of the year. Sterling is forecast to fall back against the Euro to € 1.56 but to firm against the US Dollar to $ 1.48 over the next year.

US
All the major indices gained in March. The S&P index rose by 3.7%, the Nasdaq index by 6.6% and the Dow Jones Industrial index by 2.9%. The Federal Reserve voted unanimously to hold interest rates at 1.75%, but removed its previous bias that emphasised the risks of economic weakness. They now believe that the economy is expanding at a significant rate thanks to an end to the big run-down in inventories, although the strength of final demand remains uncertain. The March Institute for Supply Management manufacturing survey was again stronger than expected. A 10-point rise in prices paid, to a level consistent with rising prices, added to recent inflation concerns. Fourth quarter GDP was revised up again to a 1.7% annualized rate. Treasury yields rose by between 38 bp and 65 bp across the curve in February, with the 2-year yield rising the most. However, part of the sell-off was reversed in early April, as investors became more optimistic that interest rate rises would be postponed.

A robust economic upturn is underway, with a sharp swing in inventories and resilient consumer spending. We now see the GDP growth picking up to 2.6% this year and 3.8% in 2003. The risks are now quite evenly balanced rather than weighted to the downside. We project inflation to fall from 2.8% on average last year to 1.6% in 2002 and 1.9% in 2003. On a 12-month view, we see 10-year bond yields little changed at 5.25%. Futures markets are now discounting a more aggressive tightening of interest rates than we consider likely, even given a fairly robust recovery.

Europe
Eurozone GDP contracted by 0.2% in the final quarter of last year, led by another sizeable drop in capital expenditure. Real data released so far this year point to a modest recovery in growth from the first quarter of this year. For example, German manufacturing orders in January and February were 1.2% higher on the quarter. Interest rates were again held at 3.25% in early April and the European Central Bank (ECB) has acknowledged the higher inflation profile this year. This improved growth outlook, in Europe and the world in general, helped European equities to rally by 4.7% in March. Expectations of higher growth and inflation, accompanied by tighter monetary policy, led bond yields to rise across the curve in March.

GDP contracted slightly in the final quarter of last year but this is expected to be the bottom of the cycle and a gradual recovery in economic activity is forecast from the first quarter. We expect overall GDP growth will average 1.2% in 2002 (after 1.5% in 2001) but will return towards trend by the fourth quarter and perhaps reach 2.8% in 2003. A number of factors have caused inflation to remain above the ECB’s upper bound but, as these effects unwind, inflation is expected to drop below 2% in the next few months. Inflation is forecast to average 1.9% this year and 1.3% in 2003. European (ex-UK) equities are fair value on P/E measures and compared to bonds. However, in the short-term, earnings growth expectations still risk being revised down further. On a 12-month view, the 10-year Bund yield is seen easing back down to 5%.

Japan
Investors began to lose patience with Prime Minister Koizumi’s administration over the slow pace of reform and this has been reflected in a sharp fall in his popularity rating. The earnings outlook for companies remains grim. An aggregate decline in earnings of over 40% is now likely for fiscal year 2001. However, analysts are now beginning to focus on the outlook for fiscal year 2002, with a modest rebound expected based on cyclical recovery and restructuring. Unemployment continues at record high levels, 5.3% in January, although this figure continues to understate unemployment because of claimants falling out of the system.

Although the lack of real reform is depressing, the cyclical outlook is starting to improve, with better indications on exports, inventories and industrial production. Nonetheless, 2002 is still likely to be weak, with capital spending down markedly in response to last year’s sharp fall in corporate profits. We now expect a fall in GDP of 1.1% this calendar year to be followed by expansion of 1.4% in 2003. The Yen has returned to a 130 to 135 range against the US Dollar after its brief bout of strength in early March. We continue to project a 125 to 135 range against the US Dollar over the next year. The Topix index continued to rally in March, rising by a further 4.6%. Domestic buying, tighter regulations on short-selling and tentative signs of an improvement in the economic outlook were the main factors behind the rally. However, the upside from current levels is expected to be limited. Ten-year yields have fallen back below 1.4%, from the peak of over 1.5% reached in early February. JGBs offer poor fundamental value to overseas investors.

Far East (ex Japan)
The Pacific ex-Japan free index was up 4% over the month, with Hong Kong (+ 5.5%) and Singapore (+ 5%) outperforming Australia (+ 3%). We are overweight in Asian markets, preferring Hong Kong and Singapore to Australia and New Zealand. Australian trade figures show a strong domestic demand picture and, coupled with the recent surge in building approvals, highlight the strength of the economy. We expect the Reserve Bank of Australia to commence their tightening cycle in May. Data releases for Hong Kong and Singapore show signs of strength beginning to emerge. Trade data have been encouraging in recent months, with both the Hong Kong and Singaporean economies being highly leveraged to global trade patterns. We continue to see Hong Kong as a beneficiary of growth in China.

We still maintain a quality, blue-chip bias with regards to stocks. We have been in the process of acquiring several high quality companies with cyclical exposure for the longer-term. While the Australian economy remains in healthy shape, the scope for a recovery-led rally is less due to the relatively shallow downturn experienced and the significantly larger scope for recovery in the Asian economies of Hong Kong and Singapore.

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on Tel. (+66-2) 662-2009 or e-mail at info@globalinv.org.