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Are we heading for a double dip recession?

Will the US soft patch morph into a double dip recession?

ROBERT PARKER: Recent data from the US clearly shows a slowdown in the economy. Notably, consumer spending has weakened with the consumer confidence index down to 52.9 in June, sentiment surveys are weaker with the ISM manufacturing index reversing to 56.2, labour conditions remain difficult with unemployment at 9.5%, the housing market is in trouble with May new house sales down by 18.3% month on month, while monetary and credit conditions remain difficult.

Commercial and Industrial loans have fallen by 21.1% over the past year. However, the probability of a double dip recessionremains low and our forecast for 2011 real GDP growth is 2.5%. Positives are the continued strength of exports particularly to emerging markets, the consequent robustness of industrial production and an uptrend in investment spending.

However, consumer spending will remain mediocre given labour market conditions and the probability that consumers will increase their savings. Given the shrinkage of the housing sector since the end of 2006, the impact now on the economy from housing will be minimal. One conclusion is that monetary policy will stay easy and that any contraction in fiscal policy will be delayed, particularly the ending of tax rebates for middle income families is likely to be extended.

Do you expect a hard landing in China in 2H 2010?

ROBERT PARKER: There were clear signs of the Chinese economy overheating at the beginning of 2010 with all the classic symptoms of a real estate bubble in the major coastal cities. Now that inflation has peaked close to the official target of 3%, any further Chinese monetary tightening will be minimal and towards the end of this year, monetary policy may be eased.

Chinese policy is going through an interesting change focusing on maintaining strong domestic consumption and investment and trying to make the economy less export dependent. The central case is a moderation in growth to 8-10 % annualised which should be sustainable for the next 2-3 years with there only being a minor probability of a hard landing.

Which sectors or themes will be winners in the global equities markets?

ROBERT PARKER: After the poor performance of most equity markets so far in 2010, equity markets should now form a base. Investors have major positions in cash and government bonds and are underweight equities. Valuations are attractive and arguably the markets are discounting too much downside risk, particularly in the US economy and investors’ concerns over European sovereign and bank risk and over a Chinese slow down are overdone.

Over the next 3-6 months, equity markets should stage a recovery. The outperforming sectors will be those with low leverage, where margins are not threatened and where there is little spare capacity. Sectors which fulfill these criteria are food, telecoms, infrastructure, IT, and healthcare.

Longer term investor themes are sustainability, viz alternative energy, demographics, viz healthcare, emerging markets, the food/agriculture sectors and infrastructure.

Will the 1H emerging markets underperformance relative to developed markets continue in 2H?

ROBERT PARKER: Emerging markets should start now to outperform developed markets. The valuations looked stretched at the end of 2009 and by mid 2010, valuations are now cheap on a relative basis.

The major headwind for emerging markets was the fear of monetary tightening and with the exception of India, the tightening process is now largely completed. In addition, as investors slowly rebuild positions in equities divesting from cash and bonds, they will be attracted by the superior growth prospects in emerging markets and by the trend positive outlook for corporate earnings growth.

What are your forecast price ranges for gold and crude oil in 2H 2010?

ROBERT PARKER: Intuitively, investors regard commodities as inherently volatile. Over the next 12 months, however, volatility should fall. Oil is supported by US exploration cutbacks and the continued strength of Chinese demand but will struggle above US$ 100pb since at this level, world growth becomes highly sensitive to the oil price and the economics of alternative energies become more attractive.

We consider that oil will continue to trade in a narrow range of $70- 90pb. Gold has recently failed to rally further as investors become more relaxed about Eurozone risk and as inflation data in the G3 is improving.

Although a weaker US dollar should lead to gold trading up to $1,300 per oz in 2011 , in the near term , downside risk is more pronounced and the price vulnerable to profit taking”.

Will the current rally in sterling (cable) and Euro continue in 2H?

ROBERT PARKERSterling should rally further in the near term partly due to the US dollar weakness but also as short positions are closed off.

The market reaction to the measures taken by the new UK Coalition Government have been positive. However, the trend in the UK is for interest rates to stay low to offset the tight fiscal policy so after a period of 3 months recovery, Sterling’s upside is limited. Likewise , the Euro could move back into a range of Euro 1.30-1.40 over the next 3 months but thereafter it’s potential for further recovery is limited.

Market talk of the Euro breaking down towards parity is very misguided. Over the longer term, the trend in emerging currencies, particularly in Asia and Latin America is clearly one of further appreciation.