The following are Sit Investment Associates’ monthly domestic and quarterly international outlook and strategy summaries. These summaries contain the collective opinions of our analysts and portfolio managers and are provided for informational purposes only. At the end of each calendar quarter, copies of the full domestic and international publications are available. While the information is accurate at the time of writing, such information is subject to change at any time without notice, and therefore, so may the investment decisions of Sit Investment Associates.
Domestic Outlook and Strategy
July 9, 2008
Domestic equity markets were weak in June. Fixed income markets also struggled and U.S. Treasuries underperformed for the quarter as a partial reversal of the flight to quality unfolded. The final estimate of first quarter real GDP growth was revised up slightly to +1.0 percent, and we expect a similar level of quarterly economic growth through the balance of the year. Notwithstanding the difficulties facing consumers, we expect the tax rebates to undergird solid personal consumption expenditure growth in both the second and third quarters. This is a key element of our GDP forecasts. The Federal Reserve left short term interest rates unchanged at its June meeting. In fixed income portfolios, we are focused on securities which will outperform in a steepening yield curve environment. In municipal bond portfolios, we continue to look for opportunities created by the unprecedented dislocations that have occurred in that market. The ongoing slowdown in corporate earnings continues to favor companies with above-average earnings growth. We are maintaining overweighted positions in the healthcare and technology sectors, while being attentive to evolving market opportunities in the consumer and financial sectors.
We continue to believe that the recovery from the current economic downturn will be slow and drawn out, largely as a result of the correction in residential real estate that will persist well into 2009. With the exception of financials, most industry group earnings have held up well despite the challenging environment. Superior stock selection continues to be important and we expect growth stocks to continue to outperform as their more stable earnings growth prospects remain attractive in a difficult earnings environment.
For a complete copy of the latest quarterly summary, click here: Domestic Outlook and Investment Strategy (Adobe Acrobat) or e-mail us at: siainfo@sitinvest.com.
International Outlook and Strategy
July 9 , 2008
The global economy is reeling from the aftermath effects of the U.S. financial crisis, rising commodity prices, and mounting inflation. Last quarter we drastically revised down our global economic growth assumption to +2.0% and believe this is still realistic for 2008. U.S. GDP growth will be weak in 2008 at around +1.6% as the credit crisis and lack of consumption demand weigh on growth. The U.S. appears to be teetering on a recession and may fall into one if commodity prices rise further, the financial crisis takes another leg down, and/or the consumer weakens further. International markets will continue to have stronger absolute growth; however, the growth rate is moderating in nearly every market as these markets feel the impact of the weakening U.S. economy. Within Europe, growth will be less than +2.0% as inflationary pressures, the declining housing market, and consumer weakness continue to take hold. While the Japanese economy is slightly more insulated from a global slowdown, declining exports, virtually no domestic demand growth, and mounting inflation are producing a stagnate economy, with growth only marginally exceeding +1.0%. In Asia ex-Japan, China and India will continue to experience strong growth, albeit at slower rates than that of 2007, around +9.0% and +7.5%, respectively. Overall, in Asia ex-Japan we see GDP growth around +8.0%. See Exhibits A and B for our global economic forecasts.
Rising commodity prices (energy, precious metals, and agricultural products) are resulting in higher inflation on a worldwide basis. Oil exceeded $140 per barrel in June and doesn’t look to materially decline anytime soon given the supply constraints, demand needs, and geopolitical concerns. Grain prices are near record levels due to emerging market demand and abnormally low inventories. For 2008, we drastically increased our inflation expectations for nearly every region and now expect global inflation of roughly +4.0% versus +2.8% last quarter. See Exhibits A, B, and C. While slower growth may partially mitigate the inflation impact, we don’t believe the full effect of rising prices has been felt by the global consumer and remain watchful of further slowing growth.
The divergence in strategy between central banks that we highlighted last quarter became even more apparent when the European Central Bank (ECB) raised rates by 25 basis points to 4.25% on July 3rd. With the exception of emerging markets, most central banks have either held steady or decreased rates during the last three months. The ECB’s rationale was to step up efforts to control mounting inflationary pressures. In April, both the U.S. Federal Reserve and Bank of England (BOE) cut rates by 25 basis points to 2.0% and 5.0%, respectively, in an effort to stave off inflation. Barring another crisis, we don’t anticipate the ECB or BOE to change rates in the near term. The Bank of Japan (BOJ) has been forced to maintain a steady policy at 0.5% as the economy appears to be experiencing stagflation and there is no political leadership. Given little expected change in the economic situation, we do not anticipate any changes for the remainder of 2008. In response to the rapid influx of liquidity, the People’s Bank of China (PBoC) raised the reserve requirement ratio by a total of 100 basis points to 17.5% which started June 25th. The PBoC has been very aggressive in stemming the robust growth and it appears that this approach has been somewhat effective. We do not anticipate the PBoC to be as aggressive as it has been in the past as inflation concerns subside. See Exhibit D for central bank movements.
For a complete copy of the latest quarterly summary, click here: International Outlook & Strategy Summary (Adobe Acrobat) or e-mail us at: siainfo@sitinvest.com.
