The edited transcript of the discussion begins below:
PENSIONS & INVESTMENTS: What is your outlook for the global economy in 1997? Which will be the strongest/weakest regions?
ALLAN MCKENZIE: We think growth rates are going to converge around the 2% and 21/2% level, with possibly the U.K. being the strongest at 3% to 3 1/2%, with maybe Italy in the European area in general being the weakest.
P&I: Nilly, which do you think will be the strongest areas next year and which the weakest?
NILLY SIKORSKY: We do not consider this enormously relevant because we are stock pickers.
Everybody is underestimating growth in continental Europe because I think there is a lot of backed-up demand due to the fact that, basically, people have not consumed very much since the Gulf War. So we might be surprised on the upside, just about everywhere in the world, but probably Europe in particular.
P&I: Alan, what are your views on the strongest and the weakest for the global economy?
ALAN MCFARLANE: We approach it from the angle Nilly approaches it from, namely we are trying to understand what environment companies are operating in. Allan's remarks, I guess, were directed at the large economies.
I think there will still be much higher growth rates in some of the pockets of the world; for example, Hong Kong will grow a lot faster than 21/2% next year.
The risk with respect to (gross domestic product) estimates is not so much the real growth rate but the component of the nominal and the inflationary side of it. For me, the key question is: How deflationary, potentially, an environment might we be in in 1997?
DICK SNIJDERS: We think that, on average, 1997 will be more on the positive side than we anticipated about half or three-quarters of a year ago. We are slowly moving to a less pessimistic view. We think low inflationary levels can be contained longer than we thought they could.
We think there will be a difference, though, within the countries between various sectors of the economy, and that will be more important than the differences from country to country. Some countries in Europe will still have to do a lot of restructuring. France, I think, will be at the low end of the estimates with about 21/2% to 3%. Others can grow a bit more than 3% or even 4%.
P&I: Dean, what are your thoughts?
DEAN BUCKLEY: We expect a slightly above-trend output growth in 1997. We think that outside the U.S. there are some pretty large output gaps, so we do not see any strong inflationary pressures. We do think, though, that monetary policy will be slightly less accommodative as we move through 1997.
I think it is a pretty good bet the U.K. will have the strongest economic growth among the major economies. We have had a 3.3% growth forecast for GDP throughout this year, for 1997, and we think that from that forecast we are clearly on the upside. For the weakest economies, it could be a close thing between Italy and Japan, but the key thing about European economies is they are strengthening and they could well surprise on the upside next year. I think the U.S. probably will be about 21/2%.
TONY THOMSON: I was glad to finally hear something I slightly disagree with. I was just in Japan last week and I think it is hard to say what the consensus is for Japan because, clearly, there is a local consensus and a foreign consensus. But I think even the foreign consensus is a little low. I think they will probably get over 2% in Japan, somewhere between 2% and 3%, and I think it might surprise people.
Otherwise, I do not disagree with anything I have heard. I think it is a benign environment.
P&I: What about interest rates around the world? How do you see them next year, Tony? Are they going to be high, and in which countries?
MR. THOMSON: Again, in this environment, I would not expect great interest rate surprises. I think U.S. rates probably will pick up a little and then come off again, probably ending around 7%. I think there could be some pleasant surprises in the U.K..
MR. BUCKLEY: The U.K., I would say, 100 basis points higher, 12 months out; the U.S., no move for three months, and then probably edging higher; Germany, we think rates are bottom but we do not see them moving at least until the third quarter next year; and Japan, we cannot see any reason at all for a rate increase in Japan.
MR. SNIJDERS: When I hear this I think a bit about what we all said at the beginning of 1994: everybody said rates could fall further and from the next day on, they increased.
Actually, we thought we were close to that point about a quarter ago. But, no, we are still in line with that consensus and we think especially in Germany and the Netherlands, the interest rate may be even at a somewhat lower level than it is today, but not much, with some tendency to increase again at the end of next year; maybe a bit earlier in the States.
MR. THOMSON: I was really talking about the long bond. I think U.S. short rates might pick up a little, but I think they are likely to drift down again.
P&I: Alan, what are your thoughts?
MR. MCFARLANE: I think the consensus in bonds just now is too benign, and there is certainly a risk out there to a number of market valuations if there is any change of view. There is no great need for a dramatic rise in bond yields anywhere, but I just worry about the sentiments in a few markets.
P&I: Nilly, what are your thoughts?
MS. SIKORSKY: I think there is more concern of deflation in many parts of the world than of inflation, for instance Japan and continental Europe. So I would expect bonds to do quite well in the first part of the year, and then back down again when the economic growth picks up strongly.
The only exceptions to this scenario could be the U.K. and the U.S. - but I would not be surprised to see bond rates at the end of next year at the same level as this year.
MR. MCKENZIE: Our top-down view is probably that interest rates in the U.S. maybe will go up a bit, but our stock-pickers are coming round increasingly to the view that interest rates might actually go down a bit. So there is a bit of a debate going on there. But I do not see any immediate pressure for U.S. interest rates to go up.
In Japan, with the budget deficit increasing, that is a real worry for them. So if they are going to tackle the fiscal side - given that the economy is just making a good recovery out of recession -interest rates probably will stay in a fairly benign state.
The U.K., because it is growing so strongly and there are worries, perhaps, on the (government's) borrowing requirement, I think the pressure there will be for interest rates perhaps to be on a slightly rising tack.
In Europe, again, with convergence and EU and all that goes with it, I think the pressure on the fiscal side will have to be offset by an easier monetary policy. So I think interest rates might go down slightly.
In terms of bond markets, perhaps the key might be what the Japanese do. They have been voting with their feet and putting a lot of money into overseas bonds as well as their own domestic bond market. But if the perception of the yen changes, you might see that flow changing as money comes back into Japan. That might have a global impact on bonds and interest rates.
P&I: Let us take the stock markets one by one, the regions one by one. North America: What is driving the U.S. stock market at present? How long can it continue? Is there a correction in store and what would bring it on?
MR. SNIJDERS: There will be a correction. The question is when.
We do not think it will be soon. I think there is big support in the American markets from the large and substantial buy-back program we see on the equity markets. I think that will support the equity markets in the States for the time being.
P&I: Dean, what do you think?
MR. BUCKLEY: Clearly, (American stock prices) have been driven high by liquidity. Can they go higher? The answer is yes, and they probably will go higher. In the short term, I cannot really see what is going to stop that. But as we move through 1997, there will be a correction, and there could be quite a sizable correction in the order of 10% to 15%.
What will cause the correction will be a combination, I think, of rising interest rates, slower earnings growth coming through and a valuation in the U.S. market that is already extremely stretched. So, there will be a correction.(contd.)