European markets are torn between hopes for a soft landing in the US and fear of the opposite, accor...
European markets are torn between hopes for a soft landing in the US and fear of the opposite, according to Jamie Sanderson, fund manager of the Edinburgh European CI unit trust.
Sanderson says economically sensitive stocks will see a strong rally in the event of a soft landing across the pond, however, a hard landing would see the same stocks hit badly.
According to Sanderson, the market as a result is priced at a level somewhere between the two possible outcomes. Amid this uncertainty he has been increasing his weighting in defensive stocks.
Stephen Macklow-Smith, manager of the Fleming Select Continental European fund, believes Europe will take longer to follow America's lead in interest rate cuts. He says: "While I think the UK will be quicker to respond to the Fed's recent cut in interest rates, I do not expect European interest rates to fall until the middle of the second quarter.
"Conditions in the market until that time I expect will be quite volatile, we have already seen signs of this when the US eased interest rates." The Bloomberg Europe 500 index rose 1.47%, in euro terms, immediately after the rate cut, and from 4 January to 9 January has fallen 1.69%, in euro terms.
Macklow Smith says: "We try to maintain overweight positions in both growth and value, this means we tend to operate on a fairly even keel.
"At the moment, we are trying to maintain overweight in stocks which can demonstrate positive earnings revision which we believe are long term winners."
Despite positive long term prospects, Macklow-Smith believes news from the economy will continue in a negative vein.
However, this may not be an entirely negative situation according to Mark Peden, fund manager of the Ageon (previously Scottish Equitable) Europe Tactical Fund.
He says: "Bad news for the economy is not necessarily bad news for equity markets. When investors are faced with bad tidings over the economy, they tend to run for cover in the bond markets. Equity valuations are based on bond yields, if these go down, which happens when the bond market is in favour, this tends to have a positive impact on equity markets.
"There has been a fairly strong bull market in bonds recently but this is coming to an end and we expect yields to rise in the near future."
Peden also says that cyclical stocks will benefit from bad news, he says: "The best time to buy cyclical stocks is when news is at its worst, this tends to be when they are available at their lowest valuations, and is inevitably followed by a rise."
Peden also believes Europe will hesitate before following the American lead. He adds: "The European Central Bank tends to lag behind the fed by around three months,
"At present, they will face difficulty lowering interest rates because inflation levels are still way above target."
However, Peden is positive about the future for European equities, he believes the yield curve is ready to steepen, and markets will pick up.
When the curve is steep, as Peden predicts it will soon be, interest rates in the short term are likely to fall and as a result he believes the economy will to accelerate.
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