The US is in economic recovery, but of a very different type to those seen before, according to ABN ...
The US is in economic recovery, but of a very different type to those seen before, according to ABN Amro.
David Watson, fund manger at the group, believes the slowdown had been caused by excessive capital expenditure within industry, especially within technology, creating overcapacity.
By contrast, the consumer has held up relatively well, according to ABN, although the effects of 11 September and the Enron affair have buffeted private investors and made them distrustful of Wall Street.
Watson said: 'There is recovery as the consumer never went away. His demand is stable but there is no pent up demand. So we should expect GDP growth of 3%-3.5%pa, not the 6%-7%pa you usually expect coming out of a recession.
'Monetary and fiscal policy are both good and Alan Greenspan is unlikely to retire until he is sure the cycle is doing well.'
ABN believes the market is trying to grapple with what the future growth rate on the S&P is going to be, something that ABN estimates at 5.75%-6%. The group is factoring in profits growth of around 10% for the S&P 500 in 2002 and does not believe there are any more Enrons waiting in the wings.
In this environment, the portfolio is focused on healthcare and consumer staples, exhibiting predicted year on years earnings growth for first-quarter 2002 of 12% and 8.4%pa respectively, according to Morgan Stanley research. This compares with 2% for telecommunication services and -31% for information technology.
Watson said his two favoured sectors would provide consistent growth with March quarter 2002 year on year consensus earnings expectations of 10.6% for healthcare and 8% for consumer staples, against technology at -31.2%.
Both favoured sectors are coming off the back of strong performance during calendar year 2001 with reported earnings of 8.1% for consumer staples against -30.7% for the S&P 500, while healthcare managed 10%.
Watson remains deeply sceptical of technology where he sees profit problems remaining as there is still excess capacity.
'The problem is that in 1999 and 2000 CEOs put in place plans that assumed their then growth rates would continue,' Watson said. 'They geared up on plants and people.'
He added this problem has been compounded by tech companies buying up technology from other tech companies.
According to the Federal Reserve capacity utilisation in the computers and office equipment, communications equipment and semiconductors and related electronic components sectors has fallen dramatically from the fourth quarter of 2000 to the first quarter of 2002, from around 80% to about 65%.
'Capacity has actually gone up 8% during 2002 in selected high tech industries,' said Watson. 'So more supply means lower prices.'
While tech still makes up 15% of the S&P, ABN believes the sector is not cheap and its track record shows it can be cyclical.
From meeting company executives, Watson said it was clear that they were prepared to spend on technology but only if had an impact on bottom line profits. This means spending is likely to be on software programmes rather than on items such as servers. Watson said the present circumstances showed the importance of growth managers being able to find a high quality of management.
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