Fund manager's comment/Graham Bamping
The first half of this year unfortunately saw more of the same for the major stock markets, as a wave of negative earnings news flooded the market, with technology, media and telecoms shares showing particularly poor returns.
In our view, a protracted global economic growth slowdown is likely to be avoided, with the relatively flexible US economy leading any upturn. The old economy appears close to an interest rate-led turnaround, although relative inventory levels suggest the upturn in technology and telecoms is likely to lag the cyclical upturn.
European shares followed the global trend during the first half of 2001, with euro weakness rubbing salt in the wounds of sterling-based investors.
The upward trend in inflation prevented the European Central Bank (ECB) from cutting rates for much of the period, although it finally relented in May, reducing interest rates by 0.25%.
However, this provided little respite for the stock market because it was not seen as the beginning of an easing cycle but rather the fine-tuning of a neutral policy.
In recent weeks it has become clear that growth expectations for mainland Europe are sinking, in reaction to the downturns in the US and Japan. However, we expect a combination of tax cuts already implemented and interest rate reductions to provide support for the continental European economy.
In addition, decelerating food and energy prices should provide the ECB with further room to manoeuvre on rates. We believe an additional 0.25% interest rate reduction is likely at some point during the second half of this year, although the exact timing is difficult to predict. Many institutions are holding high levels of cash and, with 10-year yields at around 5%, bonds appear to us to be a relatively unattractive alternative to shares.
The UK economy proved it was somewhat insulated from global pressures during the first half of the year, with robust consumer demand evident in house prices and retail sales news. However, export-driven sectors have had to face up to slowdown in the rest of Europe in addition to US concerns. Although the manufacturing industry has suffered, it represents less than 25% of the UK economy and has been in decline for several years.
Consumption is far more important and general indicators of consumer confidence have remained in a reasonable state in recent months. However, corporate earnings news has recently indicated a more mixed picture of UK consumer demand.
Until recently, eurozone economists believed that their home territory was relatively immune to the US slowdown. This has proved to be incorrect. Whether the UK will follow suit is likely to be a major focus for investors as the results season unfolds.
Eurozone inflation is likely to drop.
Disposal of undeclared cash.
UK supported by domestic demand.
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