Pity the professional fund manager. Just when everyone had learned the mantra 'old economy bad, new ...
Pity the professional fund manager. Just when everyone had learned the mantra 'old economy bad, new economy good', stock markets around the world showed yet again their capricious nature.
In the first quarter of 2000 the savage sell off of TMT was matched only by the sudden return to favour of those stocks that in 1999 we thought were too boring. Now valuations have partly corrected, where next?
Going into the quiet summer months, it is difficult to see reasons for investors to push the US market higher. We are still concerned about overall US equity valuations. Tech stocks have rebounded somewhat in recent days but this looks a little overdone given Microsoft's woes and the possibility of a number of dot.com companies running out of cash, like boo.com.
While US inflationary pressures are mounting, underlying inflation in the UK fell below 2% for the first time ever in April. The pace of growth in the UK has slowed markedly, with even the hitherto buoyant housing market showing signs of cooling. Within the equity market, sectors such as resources, construction and transport remain attractive and we see good value among smaller companies and expect corporate activity to continue to underpin valuations. However, the strength of sterling is unlikely to leave the UK manufacturing sector unscathed. Over the next few months this could mean that there will be plenty of opportunities for the astute fund manager.
In Europe, the miserable performance of the euro is still dominating sentiment. Nevertheless, we are optimistic about prospects for European equity markets. By the second half of the year quarter-on-quarter growth should be above that in the US, UK and Japan.
Japanese share prices have recently fallen away despite early indications of a robust recovery in corporate profits. However, given the absence of clear signs of a self-sustaining recovery in the private economy, it is difficult to see how such rates of growth in earnings can continue. This, and the likelihood of the yen weakening, dampens our enthusiasm.
Far Eastern markets are in better shape. Exports have been the key driver. We expect reasonable returns on a 12-month view, but are aware of the region's dependence on economic growth elsewhere.
Nick Hollings is the head of managed fund portfolios at Principal Premier
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