London based economist Andrew Hunt is warning investors not to get too carried away with thoughts that the United States economy is going to rebound sharply.
Hunt who works for Dresdner RCM Global Investors told a Guardian Trust Funds Management presentation in Auckland yesterday that the good economic news coming out of the US should be tempered with other economic facts.
The two most pertinent ones are that although the US economy grew more strongly than expected in the last quarter, producers aren't getting better prices for their goods and services.
Also investors need to be wary of the huge debt mountain in the US.
Hunt says that the Federal Reserve orchestrated a major credit boom, by cutting interest rates last year, which allowed companies to continue to refinance their cash deficit and consumers to keep spending.
This credit boom was particularly pronounced in the fourth quarter of last year.
"We suspect that this has triggered a one-quarter only inventory rebuild with the US."
"Unfortunately, recent talk of a recovery and the resulting upward pressure on interest rates has ended the credit boom, so making a US recovery now more unlikely.
"Given just how expensive the equity market is currently, this is not a positive development for equities," he says.
Hunt warns investors that the markets are likely to be highly volatile for some time now.
He says one of the worst places to be in this type of environment is index funds as investors who buy these are buying last month's winners, not necessarily the ones which are going to do well in the future.
He says the two best strategies are to either use a very good stock picking manager or to buy Government bonds and hold onto them.
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