| There is a strong belief among investors at present that
2004 will be a year of reasonably strong economic recovery
worldwide leading to a positive outlook for corporate earnings
and therefore for continued equity market gains. However,
as we go through 2004, there is a high probability of the
positive factors of 2003 (economic recovery in the US and
Japan, rapid growth in emerging economies and the improvement
in corporate earnings) starting to fade with the gradual emergence
of a number of negative factors. While a return to the “bear“
market conditions of 2000 – early 2003 is unlikely,
equity markets could go through a sustained period of modest
single digit returns. In the US, real GDP growth in 2004 should
average 4% supported by low interest rates, high levels of
government expenditure and by tax cuts for the economy. In
Japan, consumption is rising and economic activity has clearly
turned positive in the past six months. After a long period
of deflation, there is a reasonable probability that Japan
will move back into inflation towards the end of 2004. The
recovery in Europe during the fourth quarter of 2003 may fade.
Consumption and investment spending remain weak and it is
clear that if the Euro stays at current levels there will
be a negative effect on exports and growth, which will struggle
to exceed 1.5% in 2004. In summary, after the strong gains
in the past year, investors are likely to increasingly adopt
a more prudent approach.
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