richard prew believes equity rally in wake of gulf war will be followed by huge stock sales
Any equity rally in the wake of a Gulf war will probably not offer sustained upward momentum and may instead attract significant selling, according to Richard Prew, Hendersons' UK hedge fund manager.
Prew predicted that following a short and 'benign' war in Iraq there could be a 20% rise in the market. But, he added: 'I would say it is probably going to be a sellable rally, as the structural imbalances in the economy have not gone away.'
Prew cited the US and UK hiatus in corporate and consumer expenditure in recent months as longer-term difficulties. 'I see equities going sideways over the longer term, slightly down, slightly up,' he said. 'It doesn't really matter, you are not going to get returns of much more than inflation for the foreseeable future.'
Prew, speaking at a recent Bloomberg panel discussion on 'Market reaction to global distraction', added there is a danger of becoming overly bearish on equities. Pointing to some recent price recoveries in technology, media and telecom stocks, Prew said some equities are now reaching fundamental valuation points. 'You can get as bearish as you like about equities but there clearly is value there and, to my mind, it is too late to be bearish,' he added.
HSBC head of fixed income strategy, Steven Major, asked if those behind certain stock-specific rallies are 'aware of the risk they are taking on in this world of value at risk.'
He said the predominant theme in the markets is preservation of capital. Major added: 'From a personal and institutional point of view, investors have had enough of what they are being told on the equity markets.'
Gold is seen as the ultimate safe haven, Major said, followed by short-dated bonds. He added UK bond yields of 3%-4% may not sound like much in absolute terms but compare well with losing 20% a year for the past three years in equities.
He said: 'After the past three years, investors have really changed their attitude towards risk and it is a longer-term shift.'
Bloomberg columnist Matthew Lynn feels markets are still unimpressive at pricing in uncertainties such as likely military conflicts.
He said: 'A lot of this safe haven stuff strikes me as increasingly absurd but, that said, if you had moved into gold six months ago, you would have made a lot of money.'
Standard Chartered head of global strategy Gerard Lyons is bullish. He said there is every likelihood after a quick conflict in Iraq the world economy will bounce back strongly this year. Japan, he noted, has grown for the past three quarters.
'Bush's military campaign is very evident ' to first win the war and then get the economy going,' he said.
'So we will have low interest rates in the US, a phenomenal fiscal boost and every prospect of that being reinforced by lower oil prices.'
Economist Intelligence Unit economics director, Gerard Walsh, talked of other significant upsides. These included the fact corporates had recently repaid a lot of debt and the US government's plans to use fiscal deficits to stimulate growth.
However, building a huge US deficit might cause problems further into the decade, Walsh cautioned.
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