SChRoDERSALOMONSMITHBARNEY PREDICTS ACTIVE MANAGEMENT needed TO ACHIEVE OUTPERFORMANCE
Global markets are unlikely to rise further than 15% above current levels, leading to an era of range-trading and outperformance by active fund managers, according to SchroderSalomonSmithBarney.
The group believes there is limited scope for a re-rating of world stock markets and that over the medium-term they are likely to trade around a trend line more closely associated to long-term earnings growth than they have over the past decade.
Although this may hamper returns for index funds, which would see performance limited by small market rises, there is increased relative opportunity for active managers to add value by avoiding losers and picking winners.
Matthew Merritt, global equity strategist at Schroder-SalomonSmithBarney, said: 'We have characterised the 1990s as the bull run that simply went too far. Falling bond yields throughout the decade justified higher P/Es but markets clearly overshot.
'As a result, a structural adjustment in valuations combined with a cyclical slide in earnings to create the biggest bear market since 1974. Our sense is this period is over.
'The cyclical outlook is brightening; economic recovery in the second half of 2002 should support the medium-term earnings outlook and this expectation has lifted equities since late September 2001.
'Valuations still appear more comfortable, suggesting the bounce may have further to run in the near-term. However, as earnings are delivered, the discount rate, that is government bond yields, which we apply to stock market valuations, will rise.
'Moreover, there is limited scope for a further re-rating in market multiples and these factors may well create a valuation ceiling some 15% above current index levels.'
Merritt said even if index volatility is low it does not mean the dispersion of returns across countries, sectors and stocks will greatly shrink. He said although the spread of returns does tend to decline, it remains significant.
According to the research group, the last period of range trading for world equity markets was between April 1991 and June 1995 during which time period total returns were 25.8%.
According to the group's research, during these four years the difference in return between the top quartile sectors in the world equity market and the bottom quartile sectors was 49%. The group also found that the top quartile sectors delivered returns that were 22.3% better than the market over the same four year period.
In terms of avoiding losers, the bottom quartile sectors as a whole performed 17.9% worse than the market over the period between April 1991 and June 1995.
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