Despite relatively aggressive interest rate cuts by the Monetary Policy Committee this year, fund ma...
Despite relatively aggressive interest rate cuts by the Monetary Policy Committee this year, fund managers do not expect further action in the foreseeable future, unless dictated by international events.
On 10 May, the Bank of England's Monetary Policy Committee cut interest rates by 0.25% ' the third such decrease this year ' bringing the cost of borrowing down to 5.25%.
Since the previous cut, on 5 April, there had been signs that the US economic slowdown has spread to Europe, prompting the European Central Bank to cut rates to 4.5% on the same day.
Trevor Green, a UK fund manager at Credit Suisse Asset Management, says the issues likely to dominate the market going forward are the same as they have been since the turn of the year ' interest rate cuts and fiscal easing.
Green says: 'For investors in equity markets, the one variable that should be shaping their broad approach to sector strategy is the US yield curve. The gradual steepening is more marked than at any time since 1991, a reason to think of a V rather than a U-shaped recovery. This suggests monetary policy is being eased successfully and the long end of the bond market is beginning to discount some kind of economic recovery.
'There is no doubt interest rate cuts in the US and UK will help the respective economies and the US yield curve believes it will work. This is critical because I believe one should look beyond short-term negative newsflow on corporate earnings.
'If in a few weeks there has been no resurgence in US treasuries and commodity prices have firmed, it will be hard to argue that the global economy and equity markets have not seen the worst.'
Green highlights one statistic to bear in mind when judging the importance of the US economy to the UK.
He says: 'The FTSE 100 index is exposed to overseas earnings and at least 30% of FTSE 100 earnings come from the US. Many of the constituents are global companies and if we see a pick-up in the US we should also see a pick-up in the UK.'
With a lot of companies still reporting earnings downgrades, he expects a market upturn in the second half of the year.
'We are looking for a recovery in the media and transport sectors although sentiment needs to improve for technology,' he says. 'We need to see earnings stability and the key for software firms is more corporate investment in information technology.'
Richard Turnill, group economist at Merrill Lynch Investment Managers, says he was expecting the rate cut last month by the Bank of England, even though inflation remains below the MPC's target. He is currently moving out of more defensive sectors towards cyclical stocks.
'There are indicators that the economy has slowed but the rate cut was good news and we expect to see a soft landing in the UK,' he says.
Although interest rates have fallen quickly this year, Turnill does not envisage further aggressive cutting by the Bank of England. 'The UK market is driven by international developments and the European Central Bank rate cut will also have an impact on the UK,' he says. 'The key is the extent of rate cuts globally.'
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