The FTSE 100 has been stuck in a range of around 6000 to 6900 for most of this year. Although some o...
The FTSE 100 has been stuck in a range of around 6000 to 6900 for most of this year. Although some of the reasons have been domestic such as rising interest rates, strong sterling, index changes and violent sector rotation, the major concern has been international.
Uncertainty over global growth prospects and the extent of inflationary pressures continue to plague global markets due to their direct effect upon interest rates. In different parts of the world there have been conflicting trends over growth, with Europe strengthening and the US and Japan slowing.
Although inflation remains under control, worries surround the general tightness of the labour markets. It is almost certain is that if US growth does not slow sufficiently the Fed will raise interest rates. This should ensure a corresponding slowdown in world growth.
In this global context the UK stands out as the only major economy in which growth is slowing the most convincingly. Indeed, some commentators are forecast that no more interest rate rises may be needed.
This scenario is positive in comparison with other markets where monetary tightening is still very much the order of the day. The fact that the UK market is slowing against a strong world economy means that the chances of a soft landing are enhanced. Our house forecast is a slowdown to around trend growth next year and then an acceleration in 2002.
The recent strength in the gilt market has left comparative equity valuations fair value against historic trends.
The one area that has become increasingly vulnerable over the past few months has been corporate earnings, where the net balance of upgrades is supported only by a very few large sectors such as oils. We should be nearing the end of this downgrade process as top-down GDP revisions stop working their way through to the corporate earnings line and falling interest rate expectations begin to be incorporated instead.
Although the overall market has remained rangebound the past few months have witnessed tremendous volatility, with the technology, media and telecoms sectors being sold in favour of old industry companies. More recently there has not been much sector leadership - rather, individual stocks have performed within various sectors.
The outlook in the next few months will be determined by Wall Street's reaction to Fed policy. The consensus now is for no interest rate change until August. Probably the most important indicator for the Fed will be employment data which has recently been supportive of an economic slowdown. It is too early, however, to indicate a conclusive softening trend.
In relative terms the UK market looks good value with interest rates near their peak, relative valuations at reasonable value and hopefully corporate downgrades nearing their end.
David Erskine is an investment adviser at Standard Life Investments
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