As the market drifts into its summer slumbers, its perhaps time to look back over the last few month...
As the market drifts into its summer slumbers, its perhaps time to look back over the last few months and assess what has happened and decide what we should be doing during a quiet summer to position our portfolios for the autumn.
After many months of market leadership, the bubble of technology prices finally burst in March. This coincided with the final demand surge from newly launched retail technology funds. Valuation between the hot new areas of the market and many old world sectors had reached truly absurd proportions.
Confronted with Vodafone or George Wimpy - the house builder at the same P/E ratio, everyone would want Vodafone, but in March, Vodafone was probably selling at something like 25 times the rating of George Wimpy. Successful investment is about buying a reasonable earnings stream at the right price and not about buying the best earnings stream at any price.
The divergence of performance over the last quarter in the income fund universe, has been much greater than normal with the best performing fund delivering over 15% appreciation and the worst fund declining by more than 10%.
Obviously such dramatic relative moves have closed considerably the valuation gap between old and new world stocks. In our opinion, best value and the greatest opportunities still exist within the value arena but the odds are no longer so overwhelming. We believe that over the next few months, the market will no longer be driven by old world or new world themes. The market will lack leadership and probably direction. Stock picking will become much more important to investment performance than capturing the right theme.
There are several conflicting influences on the overall market. There are tentative signs that the UK economy may be slowing to a more sustainable level of growth. Interest rates may be at, or close to, their peak and a soft landing for the economy will clearly be a positive influence.
Nevertheless, in many areas of the market, earnings growth continues to disappoint and there may not be much room for multiple expansion in a slowing economy. Pricing power remains weak.
The imminence of an interest rate peak; a decline in sterling and the continued strength of the European economies will favour manufacturing companies with high European exposure. In addition, many domestic cyclicals look too cheap on a soft landing scenario.
The market is likely to continue to trade within a relatively narrow range. Stock selection will become increasingly important in delivering superior returns. We still favour old world over new world but we are going to have to work harder to find our relative value.
Bill Mott is head of UK retail equities at Credit Suisse Asset Management
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