By Pascal Dowling Value investing will be the trend for the early part of 2001 as the cooling econo...
By Pascal Dowling
Value investing will be the trend for the early part of 2001 as the cooling economic climate puts a stop to investor focus on high-octane growth stocks, according to fund manager Nigel Lanning.
Lanning, manager of the Dresdner RCM Merchants Trust, said inflation is unlikely to get any lower, but he does believe interest rates will be cut to a substantial extent.
He believes this could herald a new climate of investor interest in non-growth and old economy stocks. Negative investor sentiment over the volatility of growth stocks has, Lanning believes, turned investor sentiment around.
Lanning said the Merchants Trust should benefit from this change in public perception as its portfolio aims to offer a high yield with little exposure to growth stocks.
He added: "The discount on the trust has been slightly too wide for some time, I think this is partly due to value stocks being out of favour. I believe this will continue to be the case for a little longer, however within the next six months I believe we will see the discount begin to narrow again."
Lanning is readjusting the portfolio of the trust slightly to take advantage of interest rate sensitive stocks increasing his weightings in sectors such as banking, building and some cyclical stocks which he believes will perform well over the next 12 months.
Merchant's Trust was trading on a discount of 11.4% on 12 January 2001.
Lanning believes any cut in interest rates will amount to at least 1.5% off the current figure of 6%.
He said: "During the 1990s, inflation fell from around 9% at the start of the decade to around 6% by the time the clock struck 12 on New Year's Eve 2000."
Lanning pointed out that base lending rates started the decade at 15%.
He believes this prolonged period of falling inflation and interest rates has caused a change in the nature of investment.
Lanning said: "In the 1980s, inflation was very much seen as public enemy number one and the Government spent much of its time trying to control its implacable rise.
"This was the result of a number of factors such as the rising price of oil which was followed by the Gulf War early in the 1990s."
According to Lanning, this made it much easier for companies to increase their prices, the public having a fairly tolerant, almost fatalistic, attitude towards this behaviour.
During the 1990s however, inflation fell to much lower levels ceasing to present the problem it had done in the 1980s.
Lanning said this put pressure on companies to increase the standard of their products in order to gain competitive edge.
It was no longer a time in which businesses could support themselves by hiding price hikes behind inflation.
He said: "This caused a change in the attitude of investors. "They were no longer interested in companies which could not offer genuine growth characteristics, as these could not continue to grow on the back of inflation."
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