When reviewing the performance of the FTSE All-Share index it is clear an investor bias has been at ...
When reviewing the performance of the FTSE All-Share index it is clear an investor bias has been at work. For the year to the end of December 1999, the FTSE All-Share returned 21.2%. For the same period, the telecommunication services sector returned 73.01%, while the electrical equipment sector posted a rise of 120.13%. Therein lies the story of 1999.
While we believed UK equities were at the top of their trading range as the festive period approached, the market looks well positioned to resume its ascent as we enter the new year with the rally continuing well into 2000. It seems likely that interest rates will peak this year as the threat of inflation subsides, which in turn should spark a rally in the bond market, thus providing support for equities.
It is our belief that the main drivers behind the market's rise will continue to be those areas of the equity market that we believe stand to benefit most from the environment of low growth and low inflation. Since we expect this environment to persist, we believe two industries in particular offer outstanding potential for growth. Within these we look for companies capable of achieving firm growth, with a solid franchise, quality management and sustainable earnings growth. Companies displaying these attributes will typically be in strong strategic positions and can therefore continue expanding their businesses through acquisition when opportunities for organic growth are limited by any slowdown in global growth.
One of these industries is the information technology industry. Although it has shown tremendous growth already, we do not subscribe to the belief that such growth will end with the completion of Millennium Bug projects. As a result of the cost of Y2K compliance, a vast number of other projects have had to be deferred and we believe their resurrection post-Millennium Bug together with the replacement of expensive labour with innovative IT solutions will lead to further growth in the sector.
One of the companies within this sector that we consider has strong growth potential is Sema. The company provides facilities management, systems integration and application software products. Recent contract wins reflect its increasing scale and geographic breadth, while its exposure to growth areas such as telecoms software bodes well for the future.
We also believe the telecommunications industry will see strong long-term growth, with internet usage playing an increasingly important part - internet traffic is currently doubling every 100 days. The rapid acceleration of mobile 'phone usage is also of particular interest. The horizon may look bright for those companies at the "leading edge" of the market, however, the same cannot be said for those in the consumer cyclical areas of the economy. These areas have endured a roller coaster ride in 1999 and this looks set to continue in 2000.
The generally robust nature of current global economic growth should lead to the sustainability of higher oil and base metal prices, thus putting added pressure on these already beleaguered areas of the economy. The woes of retail giants Marks & Spencer and Storehouse have been well documented in recent months, however with the current zero price inflation which exists in the retail sector, the outlook does not look at all promising.
Tim Gregory is head of UK large cap, retail at Gartmore Investment Management
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