Outlook for Asset Classes

Equities: At present it is extremely difficult to project profit, earnings and dividend growth and therefore to value equities and stock markets. However, what is clear is that in the current bear market prices worldwide have declined to such an extent that the Standard & Poor 500 Index is currently trading at a price-to-book value ratio of around 1.85 compared with an average ratio of 2.4 over the past 30 years. This is equal to the lows in 1987 and 1990.

Should the bailout plan be approved, it would be positive for global equity markets, but it would have to be followed up with lower interest rates in order to pull the markets out of the current bear phase. Emerging markets such as China would once again come to the fore as favourites.

Long-term government bonds: The decline in long-term interest rates in recent months is largely the result of fears of a worst-case scenario - namely that the bailout plan would be rejected. Should it be approved, long-term interest rates could start bottoming out and then rising slightly, whereas a bailout followed by lower interest rates would cause long-term interest rates to rise more markedly as stronger economic growth is anticipated.

Commodities: Commodity prices (oil, industrial metals and platinum) could recover somewhat if the bailout plan is approved, but would probably start falling again in the absence of monetary stimulus. On the other hand, commodity prices could strengthen if the accepted bail-out is followed by lower interest rates.

The following table summarizes my view on the likelihood of the 3 possible outcomes of the bailout plan and its effect on the global economy, financial markets and currencies:



As is evident in this table, the New Deal Plus should be the most beneficial for the entire global community. It certainly gets my vote. Let's hope common sense prevails in the next few days.