Productivity gains continue to underpin the extraordinary performance of the US economy, helping to ...
Productivity gains continue to underpin the extraordinary performance of the US economy, helping to offset the inflationary effects of the rise in the oil price.
Interest rates appear to be on hold until the end of the year. and for the time being, the stable interest rate/low inflation/steady growth backdrop continues to augur well for equities.
A new investment theme has emerged over the past year, namely that of power shortages resulting from increased internet-related electricity consumption.
We have seen brown outs and even black outs in some areas of the US as the explosion in PC usage has resulted in demand for power far outstripping supply. We have been playing this theme by investing in independent power producers such as NRG and Calpine.
While regulated local utilities are bound by the pricing and distribution rules of the local state, these independent producers are free to set their own pricing policies. This means they can sell power to local utilities at the market rate in order to meet the supply shortfall. The regulated utility must then sell it on at the price set by the authorities. Clearly, the current demand/supply picture is very good news for the independent players, and the continued growth in internet usage looks likely to underpin their earnings over the medium term.
Elsewhere in energy, we have identified a secular situation developing in the gas fired power station industry.
This form of power generation has gained popularity as consumers increasingly focus on more "environmentally polite" methods, with extra short-term support coming from the high price of substitute commodity oil.
While a slump in the oil price would reduce demand for gas at the margin, we do not expect oil prices to fall dramatically in the short term.
One of the ways in which we access this theme is via General Electric, which has sold out of gas turbines for the next four years. Technology and communications remain our other overweight positions.
Although growth potential will eventually slow in infrastructure stocks such as Cisco and Ciena as they make the transition from being seen as cutting edge technology companies to everyday capital equipment suppliers, this transition is still some way off.
In view of the more demanding market facing technology stocks this year, we have become even more selective in our holdings.
More than ever, our holdings are focused on high quality stocks.
Overall, we retain a constructive view on equities going into the last quarter of the year. The continued dynamism of the economy and the themes outlined above will help to deliver solid earnings once again for the third quarter. Market breadth continues to improve.
Has run Cautious Managed fund since 2011
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