Fed's stuntman wins accolade for high-stakes show with low rates

PUBLISHED : Sunday, 21 December, 2003, 12:00am
UPDATED : Sunday, 21 December, 2003, 12:00am

Step aside high rollers in Macau and Las Vegas, the world's top honour for high-stakes showmanship this year just might belong to the chairman of the Federal Reserve.

The daring moves to lower short-term interest rates to 40-year lows this summer are part of a high-wire central banking policy that earns Alan Greenspan stuntman status when compared to the generally staid world of his European counterparts, according to Geoff Lewis, head of investment services, JF Funds.

'If he pulls it off, it will be the most successful gamble in history,' Mr Lewis says of Mr Greenspan's accommodative monetary policy.

Mr Lewis made the comments during a round table for journalists last week to announce the brokerage's forecast for the year ahead. What he sees is an investment landscape that promises handsome bounty, but not one without risks.

'This is not the time for investors to be particularly cautious even though markets have gone up a lot since the lows,' he says. 'It is a time for investors to be overweight equities, underweight bonds. All the arguments that the bears were looking at have tended to fall by the wayside as we accumulate more and more evidence of building economic strength.'

He presented a series of possible scenarios that might play out in the 12 months ahead, and then ascribed what the brokerage's London-based global strategy team believes to be reasonable probabilities.

The main scenario, given a 50 per cent likelihood, is continuing global growth, with substantial improvement in Europe. In this scenario, equities outperform bonds, led by value markets in Asia and Japan. However, US stocks will likely be held back by high valuations.

The second scenario, given a 30 per cent probability, is a weakening US economy that reverts back to sub-trend growth. If this were to unfold, Mr Lewis says bonds would outperform equities. One might even expect the Fed to undertake 'unconventional monetary policies' in the form of direct Treasury purchases in an attempt to reflate the economy.

There is also a 20 per cent likelihood of a synchronised global recovery taking hold. This scenario might resemble the 1994 US experience, with modest equity gains and a bond sell-off.

As a house view, JF Asset Management is overweight Asia ex-Japan equities, European bonds and the euro; it is underweight US equities, US bonds, and the dollar. The brokerage is neutral on Japan and European equities, Australian, Canadian and British bonds, and neutral on sterling and the yen.

Mr Lewis says sceptics of the US recovery have had to eat their hats in view of the jobs-generating economy and a resurgence in investment spending. 'We think a good year lies ahead,' he says. He believes Asia offers better leverage to the global recovery because valuations are still modest, and profits growth should surprise on the upside. He cautions against exposure to US assets, warning that a 'buyers' strike' of the greenback might unfold in the next 12 to 18 months.