Manufacturing, services gather pace in first quarter

Momentum of recovery is accelerating, the first quarter of this year has shown, and the cycle of self-sustaining recovery has set in, Merrill Lynch Wealth Management has said in a report.

The US companies' liquid assets have risen by $293 billion (Dh1.07 trillion) since the start of recession and this is expected to result in bigger dividend hikes and even stock buy-backs. In addition, there is "clear evidence " of expansion in employment in the US, it said.

However, Merrill Lynch said it is steering away from a dramatic call on equities and is adding to specific areas like European equities, emerging market currencies and high yield within corporate bonds. "It has been a peculiar three months, " said the report.

While manufacturing still leads the way, service sectors have also started to see improvement in business conditions, it added.

"Evidence suggests that the momentum of recovery is accelerating after a hiccup caused by the severe winter in the US and Europe. Manufacturing is still leading the way," said Bill O'Neill, Chief Investment Officer, Merrill Lynch Wealth Management, Europe Middle East and Africa.

Restrained consumption hit service sectors but these are now seeing a genuine improvement in business conditions. "Even private consumption is proving resilient in unexpected places such as Japan," he said. The rise in liquid assets of US companies to $1.75trn and expansion in employment suggest that a cycle of self-sustaining recovery has set in. However, there still are risks, the report said.

Distressed sales on the residential side are still capping any recovery in real estate values. New home sales declined 2.2 per cent in February to a record low and the federal government is again mulling over initiatives to ease the deadweight of foreclosures on the market, the report said.

"Worldwide, governments are set to curtail borrowing, anxious to avoid a battle against time with the rating agencies. The brunt of the cutback is set to fall on spending, especially capital spending programmes," said O'Neill.

The first quarter of this year saw more worries on the state policy front, Merrill Lynch said. After Greece and the UK, China is another area where the report sees a substantial danger in policy measures.

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