Adam Seitchik believes the global recession is over and has hopes for a modest recovery in the U.S. economy.
"We are in an economic recovery with headwinds, and it would be a mistake to be structurally bullish on the U.S. We will be tactically bullish when markets are cheap and oversold," Mr. Seitchik said. He is concerned that continued pressure on U.S. and U.K. pension funds to reduce their overweight equity positions will underpin market volatility and weakness. But he expects a 7% to 8% investment return from U.S. equity markets this year.
Based on his view that the U.S. will undergo a modest economic recovery, he expects companies in defensive sectors and large-cap stocks to perform well this year. Signs of a stronger recovery in the United States would favor cyclical stocks and small caps. Industrial stocks were looking attractive at the end of 2002 and if, as he expects, investment spending stabilizes, these shares will be supported. He also sees some value in European health-care shares.
Mr. Seitchik expects U.S. inflation to fall, but is concerned that consumer spending and consumption might rise only modestly - particularly if, as he expects, interest rates continue to fall.
Growth in the U.S. economy will be driven mainly by a slight increase in investment spending. The lack of investment spending was a drag on the U.S. economy in 2002, he said.
He expects interest rates to fall further in both the United States and Europe as there will not be enough organic economic growth for central banks to decide to rein in overall spending.
The Federal Reserve has indicated it would be willing to cut rates to zero if necessary, but policy-makers at the European Central Bank have been less inclined to take such tough action. European rates could be cut by up to one percentage point in 2003 but that might not be enough to head off further economic malaise in the region.
While he does not expect the eurozone as a whole to enter recession, core parts of the region such as Germany, France and Italy will be under extreme pressure to cut jobs and control spending. Spain, Greece and Ireland are the only European countries whose economies are growing relatively strongly. European economic growth has been held back by some of the structural rigidities in France and Germany.
As a result, Deutsche is lukewarm on bonds issued by the German government because of the potential credit risks. Instead, the firm is favoring eurobonds backed by the Spanish, Greek and Austrian governments.
Chief global strategist
Deutsche Asset Management, London
Assets under management: L474 billion ($742 billion)
U.S. GDP: around 3%
U.S. CPI: 2%
Dollar to euro: $1.10
Hot markets: Spain, Greece, Ireland
Hot sectors: European health care, industrials