Commentators generally agree that the rise in the price of oil this year is likely to have little im...
Commentators generally agree that the rise in the price of oil this year is likely to have little impact on inflation but is probably going to act as a brake on the world economy. The key area of uncertainty is what will be the effect of a global slowdown on corporate earnings and, therefore, on share prices.
Over recent months, profit warnings and disappointing results have come from a very broad range of companies. Problems have included higher oil prices, the weakness of the euro or slippage in demand. It is not just large telecommunications and technology stocks that have been facing difficulties.
It has also become apparent that there are a number of trouble spots. One is highly indebted old Japan companies in real estate, construction, retailing and insurance. Chiyoda Life and Kyoei Life will not be the last high profile corporate collapses in Japan. Taiwan's financial markets have been overshadowed by political challenges; South Korea's, by the bankruptcy of Daewoo and the stalling of the corporate restructuring process. Several of the leading technology companies in East Asia remain vulnerable to falling prices for computer chips.
The news is not all bad. The weakness of the euro has presented some major continental companies with a bonanza. Even though domestic demand in France, Germany and Italy appears to be slowing, peripheral economies in continental Europe remain very strong. Most promisingly, both corporate restructuring and tax reform is continuing apace in Europe.
Stock markets probably have not fully recognised the problems. More of the news on corporate earnings is bad than good. Interest rates may be near a peak, but it is not clear that central banks will move anytime soon to ease monetary policy. Stock markets have not fully adjusted for the slowdown. To the extent that we are investing in funds that fully weight technology and telecommunications, we prefer those funds that favour the USA rather than East Asia.
The cyclical upturn in continental Europe provides several opportunities, but stockpicking skills will be increasingly important. New Japan stocks in areas experiencing secular growth such as healthcare should fare reasonably well according to our favoured managers, especially as the Japanese economy is improving.
In a year's time, investors will, we suspect, be reviewing the impact of cuts in interest rates and lower oil prices. Analysts will be focusing on an upswing, rather than a downswing, in corporate earnings. In the meantime, inflationary pressures should moderate.Over the next 12 months, both equities and bonds should deliver better returns than cash and ideal conditions for active fund managers will prevail.
Robert Burdett is director of Rothschild Asset Management Limited
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