Fund managers investing in US securities forced to reposition their portfolios
When the US financial markets re-open, many North America fund managers will move to position their portfolios in the wake of last week's events.
Some firms may not be able or willing to dramatically alter portfolio weightings as communication and computer problems are expected to continue for some time.
Gary Dugan, global equity strategist for JP Morgan Fleming, said that as some 70% of middle office exchanges were destroyed in the terrorist attacks, it makes determining stock positions, the number of shares owned and cash positions in portfolios more difficult. While secondary systems are operating, he believes fund managers investing in US securities will be cautious as they will not want to oversell some positions or move to buy only to discover they don't have the appropriate cash.
He said: 'People will back off from making any big decisions. They will look at the patterns in the European markets over the past week so when the markets do re-open there will not be the same level of volatility as seen in the days immediately following the attacks. The trends have already been identified and will be priced into the US market when it opens. There will still be volatility but not to the same extent.'
Bob Yerbury, retail chief investment officer at Invesco Perpetual, believes it likely many fund managers will take a step back when markets re-open and will wait to see how the US and the world responds to the attacks and what the effect is on the attitude of consumers going forward. He added: 'There is likely to be trading around the edges but now is a difficult time to think rationally.'
Dugan said it was likely most managers would look at similar strategies, such as getting out of airline and insurance stocks and positioning portfolios more defensively.
Greg Kerr, head of specialist funds at M&G, said: 'Airlines will be very badly hit as many won't be able to cover their liabilities from this. This industry will either go bust or be rescued by the government.'
Ian Bright, group economist at Barings, said the group was looking to sell airlines and leisure in its UK portfolios and buy utilities, pharmaceuticals and possibly telecoms.
In terms of defensive areas that will most probably see a rise, security firms will stand out, Kerr said, as more companies seek greater protection.
Dugan agreed, noting that likely moves by portfolios will be into safe, defensive stocks. Managers at Merrill Lynch Investment Management also support the idea that defensive growth sectors are likely to be favoured in the short term. In a note to intermediaries, the group said it will be seeking out investment opportunities in well-financed companies with sound business plans.
Alison Wright, investment manager at Britannic Asset Management, said: 'In the near term, the US consumer will be shopping less and less likely to travel. This fall in consumer spending would cause another round of involuntary inventory build and then liquidation. On this basis, retailers, leisure and airline stocks are likely to be areas to avoid, at least in the short term.
'The financial sector itself will undoubtedly be one of the hardest hit when the US equity market reopens, particularly insurance companies involved in the reinsurance sector. Losses will undoubtedly exceed the largest lost to date, which was Hurricane Andrew in 1992.
'But uncertainty over the extent of losses will prevail for some time. That said, insurance companies will eventually benefit from premium increases.'
Wright said that in the near term, Britannic would continue its stock-specific approach, favouring businesses that appear to have priced in any negatives and to be attractively valued.
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