By Mohamed Ali Bernat Equity markets will bounce back from their poor performance in 2000 with bond...
By Mohamed Ali Bernat
Equity markets will bounce back from their poor performance in 2000 with bonds moving into reverse, according to Peter Harrison, head of global portfolios at Chase Fleming.
Harrison said he is on the more optimistic side in terms of equities versus bonds with cashflows moving back into equities as the risk premium and valuations come down.
Harrison does not believe there will be a global recession to affect markets but said he expects profit warnings to remain a factor through to the end of the first quarter.
After this period of belt-tightening Harrison believes stock markets will rally in the second half of 2001.
He added: "Profit warnings have been incredibly widespread although the technology and telecoms sectors are still bearing the brunt, with companies like Nokia coming off nearly 20% for missing sales estimates.
"The scariest number is analysts' estimation of growth at 14.9% over the next five years.
"That figure is for the total market, not just technology stocks, and is ridiculously optimistic." Harrison said a more realistic figure is 8-9% growth and added: "The good news is there is lots of liquidity with plenty of cash sloshing around UK funds and European mutual fund restructuring still going ahead."
Harrison said he regards the S&P 500 index as a bellwether of stock behaviour.
"The last time it had two negative years was in the mid-70s when there was stagflation but I don't believe the index will be negative this year," he said. The Chase Fleming managed pension fund is 2% overweight the Caps index in UK stocks, 1.5% overweight Europe.
Harrison is neutral on Japan and the Pacific in general. He believes it is realistic to start looking at interest rate cuts in Japan again after they were raised to 0.25% from their "emergency" 0% rate last year.
"The Government has a limited number of things left in its armoury to resuscitate the economy, especially with continuing corporate restructuring affecting consumer confidence," he said.
Harrison is positive on Europe because of the long-term restructuring and deregulation of companies that is expected to increase productivity and profitability.
He said: "Europe does not look cheap on aggregate but if you look at companies at an individual level, there are a number of companies that will benefit further from the huge level of activity Europe will see over the next few years at a corporate level."
Harrison is neutral cash at 5.5% but views the next four months as an opportunity to put cash selectively into markets that sag further under pressure of profit warnings.
The global portfolio's bond allocation has been pegged back to 3.5% underweight.
He said: "There has been a huge valuation shift already in bonds and I feel we're in the last throes of that positive movement.
"There are a lot of technical issues on bonds, both in the US and the UK. Issues like MFR on pension funds are distorting real yields in the UK to around half what they are in other markets."
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