Sentiment among fund managers remains quietly confident of a gradual recovery in world economies alt...
Sentiment among fund managers remains quietly confident of a gradual recovery in world economies although corporate profits continue to disappoint in a number of highly publicised instances.
Ian McLeish, director at the Scottish Investment Trust, says the general economic background remains reasonable. 'Leading indicators in most countries are still rising although there was a setback in the US in May,' he says. 'Corporate profits in most regions should start to recover. Although there are a number of high-profile downgrades, particularly among technology companies, overall profits progress for this year and next should be satisfactory.' The main problem for markets, he says, is the continuing unrest in the Middle East and the recent corporate scandals in the US.
Within the US, share valuations are now more reasonable although telecoms and technology companies are still overvalued, according to McLeish. Further weakness in the dollar could act as a restraint to overall growth but could boost profitability in international US companies. A weak dollar would mean further profit when they converted their yen or euro profits to dollars, he explains.
Looking at the UK market in the near future, he believes share prices will struggle while earnings downgrades continue. However, moving forward he anticipates a stronger domestic UK economy next year as the US economy improves.
He favours the construction, banking and media sectors in continental Europe but notes that Europe is lagging behind the US and the UK in economic flexibility. Output growth will therefore remain tentative, he says.
Another area of concern is inflation, which remains above the European Central Bank target. 'While survey evidence suggests European and overseas fund managers increasingly favour the region given its valuation discount to the US, institutional liquidity is very low,' he says. 'Continued adverse news from the still overvalued new economy sectors and lack of confidence is driving stock markets lower as investors favour cash and bonds over equities.'
Asian markets remain volatile and nervous, McLeish says. Despite this they show value and he expects improved earnings growth. 'Hong Kong should benefit from the weak US dollar and China GDP growth of 7%-8% is expected to continue. These markets should continue to outperform developed markets.'
Chris Tracey, global strategist at JPMorgan Fleming, shares McLeish's cautious optimism on the US, noting that US stocks remain under pressure from terrorism fears and accounting scandals. He sees cause for optimism as in June, the ISM Manufacturing Index expanded at its fastest rate in two years, which he says suggests the inventory rebound is now coming through.
'We believe that industrial production is set to record substantial advances over the coming months and that this expansion will be evident in corporate reports for the broad market by September,' he says.
In Europe, both the European Central Bank and the Bank of England are likely to keep interest rates on hold, he says, thereby providing some support for European equities. This follows decisions by both banks to maintain their current interest rates for another month.
US industrial production to go up.
Chinese growth to continue.
Weak dollar will help US multi-nationals.
Recent US accounting scandals.
Overvalued tech and telecom stocks.
A general lack of confidence.
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