The backdrop for the US equity market remains favourable. Inflation appears to be under control and ...
The backdrop for the US equity market remains favourable. Inflation appears to be under control and the Fed looks to be on hold.
Corporate profit growth is strong and the overall health of the economy is good. Valuations, despite much discussion to the contrary, are reasonable for the majority of the market.
Our main concern in the macro environment is the possibility productivity growth slows with the economy, while wage growth strengthens. The Fed would be forced to hike rates, possibly forcing the economy into recession. While we do not think this is probable, there is a reasonable chance it may occur.
We remained focused on what we consider the long-term growth areas of the market; technology, telecommunications and healthcare.
The continued thirst for more dynamic data is the driving force in technology today.
As such, our focus continues to be on the suppliers to the telecommunications industry, stocks such as Northern Telecom and Cisco play crucial roles in the future of the industry. We also like ADC Telecommunications, as an emerging player in the industry. These investments are not without some risks, however. Valuations remain high, and growth is tied to spending by the service providers.
Telecommunications is an area we believe is undervalued vis-à-vis its long-term growth prospects. US Telecom companies are also at steep discounts to their European counterparts.
The changing competitive landscape and the ability to offer new products to consumers should allow for plenty of opportunity to earn decent returns. We are generally avoiding the long-distance carriers and focusing on the local exchange companies.
New businesses should reduce churn and lead to profit improvement over the next few years. This, coupled with the possibility of further expense control, gives us comfort in the company's prospects. Emerging carriers are also attractive in our view.
We are cognizant of the competitive risk however. Never in its history has the environment in the telecoms market been as crowded and aggressive in its tactics. This causes us some concern as to whether companies will focus on market share at the expense of profitability.
We are also favourable to the energy sector. We acknowledge the risk is greater with oil at $30 WTI (West Texas Intermediate), but many stocks continue to offer exceptionable value. Most companies in the oil patch are discounting oil prices close to $20, giving us confidence there is more upside in the stocks than downside risk.
Natural gas is one of our favourite themes within the energy sector. The supply / demand situation is very tight. Production growth from Canada and the Gulf of Mexico has been disappointing and the strong US economy continues to consume above expectations.
David Clott is a fund manager at Morley Fund Management
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress