Initial remarks following the US Terrorist attacksThe attacks came at a time when the US economy was beginning to show tentative signs of stability and we had becomehopeful that a recovery - albeit subdued - would soon begin. The attacks change that view. The suspension of air travelwithin the US, coupled with the severe disruption to New York`s financial centre is likely to result in the near termcontraction in economic activity. Furthermore, the linchpin to current and prospective economic health, consumerconfidence has been dealt a very direct blow. The risks for the economy must now lie on the downside. The extent of thiswill be difficult to gauge, given the positive undercurrents of interest rate and tax cuts which are now likely to be offset byconsumer uncertainty, negative wealth effects and general loss in confidence. Given the view that the US economy is adversely affected, the dollar will also have to tendency to weaken. As in the GulfWar, the dollar and consumer confidence are likely to be highly correlated for a period.
The Federal Reserve and other central banks have indicated that they will provide all short-term liquidity needed to tacklesettlement and other problems caused by market closures. Additional help is almost certain to come from interest ratecuts, as the Authorities seek to bolster business and consumer confidence, and limit the depth and length of the economicimpact. This should help build the base for recovery in 2002. The knock-on impact to the rest of the world is difficult toanalysis at this early stage. It is, however, most likely that the Asian and Latin American "production bases" will suffer asthey are highly dependent upon US economic activity. In addition, unknown contagion could heighten, for example, thefinancial problems in Argentina and also in Japan. The overall consequence will be to reinforce a low growth, low inflation,low interest rate outlook.
While the short -term outlook for financial markets will be uncertain and most likely very uncomfortable, the contraction inactivity could force quicker-than-had-previously-been-expected adjustments to the many unresolved economic imbalancescurrently present in the US and around the world. Following an initial period of uncertainty, markets may view this aspositive in that many of the current issues are likely to be brought to the fore and resolved earlier than would have otherwisebeen the case. Near term caution is still however warranted. There is presently much speculation as to what may occur onthe political and economic front, and what the possible consequences of those occurrences might be. We see little gainfrom trying to be too cleaver, and prefer instead to "manage" the risks. Focusing instead on what we can attach a highdegree of confidence in. This, for example, would lead us to seek stocks that will benefit from falling interest rates, andstocks that are largely insulated from the fallout following the Terrorist attacks but which have been oversold and now offercompelling value on a medium term view. Many of our strongest themes remain intact, and indeed are probably enhanced.For example, outsourcing, logistics and alternative energy sources. Here, we are seeking to take advantage of lower pricesto add to existing positions.
Tim Wilson, Chief Strategist, Newton Investment Management Limited
Dated 12 September 2001.