Value stocks remain unattractive in the smaller companies arena with managers holding exposure to te...
Value stocks remain unattractive in the smaller companies arena with managers holding exposure to technology stocks.
Correlation between the Nasdaq and smaller companies continues to be a problem. Share prices of many small caps, principally those associated with technology, continue to fall as investors sell on the back of US market volatility. During April the Nasdaq fell by 8.59%, in sterling terms, while the Easdaq fell by 8.14%. Yet despite this both Flemings and Baillie Gifford are not inclined to turn over their portfolios and invest in old economy stocks.
The falling share prices among technology smaller companies is not being helped by the dozens of IPOs which have come to the market this year, according to Euan MacDonald, manager of Baillie Gifford European Smaller Companies. He believes the increased supply of equity is putting downward pressure on share prices. Currently MacDonald is trading at the margins maintaining the majority of his portfolio positions of which 33% is exposed to technology. He says: "I bought the shares last year and at the beginning of this year on a three to five-year view. This has not changed just because of a two-month fall in prices."
With a relatively high weighting in technology stocks, MacDonald is less concerned about the ECB's interest rate than the 0.5% hike introduced by the Federal Reserve earlier this month. "I would only worry about the direction of European rates if I had a large exposure to engineering stocks," he says.
Jim Campbell, manager of Fleming European Fledgling investment trust, also looks towards the direction of Nasdaq and the impact any further Federal Reserve rise would have and is maintaining his exposure to tech stocks. He believes the upward movement in European interest rates will continue until 2001. Campbell says: "Inflation has been creeping up and the ECB may act by raising rates to 4.25%, with the current cycle of monetary tightening lasting until into early 2001. Until rates are seen to peak there is unlikely to be any catalyst for growth in the old economy."
In contrast to MacDonald, Campbell has reduced his exposure to technology from 60% to 50%, but he admits some of the reduction is down to falls in share prices rather than the sale of holdings.
The sale of technology companies is not a sign the trust has increased its exposure to value stocks. Campbell says: "I am favouring strongly focused growth companies away from the technology sector, such as temporary employment agencies, Hugo Boss and Ryanair."
Ryanair is a profitable European airline with a 20% operating margin, according to Campbell. On Hugo Boss, Campbell says sales are benefiting from increased spending in Europe but also from sales in the US and Japan. For the time being Campbell believes share prices will continue to fall.
On a macro view Flemings believes growth will be buoyant for the rest of the year, with consensus forecast of 3% GDP. The group also expects robust earnings growth of 18% in 2000, which will provide support for equities, while corporate restructuring and economic and fiscal reform presents opportunities for enhanced returns.
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