Fund manager's comment/Ian Cooke
Significant interest rate cuts in the US since January will help to underwrite a return to stronger economic growth this year, and a more constructive backdrop for corporate profits into 2002.
Nevertheless, there are concerns about the type of recovery we can expect in the US. Consumer spending, for example, has held up well over the past year, and consumer confidence indicators continue to be strong. This means there is a lack of pent-up demand from the consumer going into a recovery, which usually helps to kick-start a recovery.
Furthermore, over-supply in the technology sector means it is unlikely we will see a quick recovery in capital spending.
This decline in capital expenditure and the lack of pent-up demand by the consumer imply a more moderate recovery for the economy. However, moderate sustainable growth has historically been positive for equity investors. If the turn we have recently seen in the US leading economic indicator is confirmed by the economic data later in the year, markets everywhere will benefit.
We believe the scene is set for better US equity performance in the second half of this year. Markets have already begun to anticipate that the looser monetary policy of the Fed will be successful.
In technology, for example, news of capacity closures and mergers serve to hasten a return to health for the industry. In the most economically-sensitive areas, semiconductors and computer hardware, sentiment is improving and early signs of resumption in orders are taking place.
In anticipation of improving growth, we look to technology to provide strong returns as confidence returns.
These companies have fallen furthest and have been the focus of most of the negative news during the past year. This leaves much to gain from a shift in sentiment.
However, the lack of pent-up consumer demand steers us away from firms that depend heavily on the consumer. The US consumer cyclical sector has performed strongly during the first half of 2001. Maintaining confidence in this sector at a time when unemployment is rising will prove challenging.
We are optimistic about the opportunities for the healthcare sector, especially the pharmaceutical firms. Having acted as defensive havens during most of last year, the group has suffered for much of this year. However, lower expectations for S&P earnings growth in 2002 is increasing the relative attractiveness of these companies at the same time as investors are recognising the growth prospect for earnings.
Lower rates will underwrite a return to growth in the second half of this year. Equity markets historically perform well in periods of lower interest rates and moderate economic growth. This is precisely the type of period we are now entering.
• Equities perform well when rates are lower.
• Technology growth as confidence returns.
• Sentiment improving in certain sectors.
• Lack of demand is slowing recovery
• Rising unemployment may harm confidence.
• Oversupply in technology sector.
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