Citigroup Asset Management predicts solid growth

Firm forecasts stable economic growth for the short term but does identify some inherent global risks.

Citigroup Asset Management has released it market outlook for the fourth quarter of 2005, forecasting a quarter of steady growth replete with forseeable hiccups on the global economic front. Delivered by Dr. Kevin Hebner, its Tokyo-based global investment strategist, the presentation was entitled Solid Growth and Moderate Inflation, Masking a Precarious Balancing Act and offered few punches that detracted from the title.

The word from Citigroup Asset Management is that economic growth, both globally and regionally, will remain steady for the coming quarters, but certain problems could emerge over the longer term.

"Currently, we are experiencing a smug and comfortable environment, but as time goes on the economy could become quite a dangerous balancing act," says Hebner. "In the short term, it is not going to be overly problematic, but there is potential for it to go quite wrong."

In macroeconomic terms, the asset manager sees many factors that will sustain the current period of consistency. Across most major markets, inflation is predicted to remain steady, while concerns over US housing prices and the spiralling US current account deficit are understood by Citigroup Asset Management to be manageable.

Hebner also chimed in on the global debate of rising oil prices and the implications of barrels hitting $80 per barrel. If global oil prices continue to be a demand driven story, Hebner believes that inflation will not follow the cycle of the 1970s and echo in a new age of spiralling CPI numbers. Instead, Hebner stresses that high demand-driven oil prices will probably fuel global GDP and mirror international growth cycles.

"Global growth is strong and if demand-driven consumption pushes oil prices to $80 per barrel, global growth will not head into tailspin," he says. "Demand-driven oil prices increase GDP and are something of a tax on the global economic growth and a stabilizer. If higher prices were supply-driven, it would be a negative story for equity markets and the global economy."

However, according to Hebner, the environment for equities is prime, while fixed income instruments will remain expensive. Citigroup Asset Management believes that earnings for global equities looks positive over the next 12 months, with an estimated 8% rise in EPS, strong valuations and a roughly 6% return on the MSCI World Index in the coming six months.

He also explains the group's belief that Asian currencies are very cheap and ready to follow an impending lead of China and appreciate by over 15%. He went on to explain that only political intervention could usher a period of correcting appreciation and that by implementing monetary change, China follow the same path as Japan, Korea and Taiwan before it, which floated their respective currencies only to see them healthily appreciate over time.

"Asian currency appreciation can't happen without China's lead and over the next 12-18 months, only politics will determine when and where it happens," Hebner stresses.

On the downplay side, Hebner attempted to quell fear over a US housing bust occurring. Although he produced data to suggest that housing prices are clearly stretched and the composition of mortgage debt on total household debt is surging, Hebner stresses that a strong domestic labour market and a plateau period of consumer debt was likely to produce a sector that will rust rather than bust.

If the market was to bust, Hebner states that US consumption undoubtedly rates would tank and global economic growth would hit, with Asian exporters likely to feel a sharp pinch.

He also downplayed suggestions that the current account deficit in the US could turn into an escalating problem, suggesting that it was driven by relative growth rates and that $700 billion require to balance the budget was easily attainable through international (mostly Asian) investments into US long-term securities.

Hebner was also quick to laud the recent upturn in the Japanese economy, predicting improving ROEs, further debt pay-downs and a positive move to core CPI in quarter one 2006 to usher in a more normal monetary policy.

On the investment side, he stressed that the group is overweight on Japanese equity for the time period and generally very negative on Japanese government bonds (JGBs).