UK Equity The FTSE All Share Index fell by 1.5% in May. Since the start of 2002 the All Share ...
The FTSE All Share Index fell by 1.5% in May. Since the start of 2002 the All Share has fallen a total of 1.9%, largely due to
poor returns from the TMT (Telecommunications, Media, Technology) sectors. The leading sectors in May were Tobacco
(+15.8%), Steel (+11.8%) and Mining (+8.1%). The under performers were Software (-14.1%), Pharmaceuticals (-11.2%) and
Life Assurance (-6.8%).
First quarter GDP was revised down, leaving it almost unchanged from the previous quarter, at +0.1%. In general, company
results have matched those reduced expectations causing profit warnings to subside. Survey evidence continues to support the
case for recovery, although there are some doubts as to whether the Chancellor's 2% growth target for 2002 will be met.
The weakness in the pound should promote economic activity and support the case for higher interest rates to cool down
buoyant consumer expenditure.
The FTSE Europe ex.UK Index was down 3.4% in local currency. The strongest sectors during May were Forestry (+10.3%),
Automobiles (+5.5%) and Household Goods (+5.4%). The weakest sectors were Software (-16.9%), IT Hardware (-11.0%) and
Other Financials (-7.6%).
The European Central Bank (ECB) has signalled that official interest rates will probably remain on hold in June as upward inflation
risks have diminished, thanks in part to lower oil and non-oil commodity prices. Consumer spending remained depressed during
May, with confidence falling in Germany, Italy and the Netherlands. There appears little evidence therefore, that supportive
monetary conditions are helping lift consumer confidence.
Despite falling consumer confidence, manufacturing output looks set to rise in the coming months, as evidenced by rising
business confidence and increasing orders. Exports are expected to rise in the coming months, reflecting both the global
recovery and a competitive exchange rate (albeit with the euro beginning to strengthen relative to the US dollar).
The S&P 500 Index returned -0.9% in May. Large Cap stocks such as IBM, Microsoft and many of the Insurance and Technology
stocks had another difficult month relative to value sectors such as Tobacco. Falling profits mean that US equities still look
expensive, despite the decline in the market.
Prior to May demand for US exports had been strong, and countries keen to trade with America borrowed US dollars from the
American government. The interest payments gained in this fashion enabled the US government to finance their current account
deficit. However, there has been some evidence that the pace of demand for US assets has started to slacken, causing the
dollar to weaken against most major currencies and introducing the problem of financing the widening current account deficit.
Despite such evidence suggesting a slowing of the first quarter recovery, overall the US cyclical upturn appears durable. The
US consumer still appears to be robust with retail sales stronger than expected. High oil prices continue to be a concern but
inflation remains subdued, leading to expectations that the Federal Reserve will be slower to raise interest rates.
The TOPIX returned 6.7% during May in contrast with the S&P 500, which was down 0.9% over the same period, and the
NASDAQ, which fell 4.7%. The best performing sectors included Oil, Real Estate and Mining, with negative contributions from
the TMT sector. Indeed, most companies have revealed higher than expected results and are forecasting significant profit rises
for the coming year.
Foreign capital continues to return to Japan as investors re-weight their positions amid increasing evidence that the Japanese
market is cheap relative to the US. There is a particularly healthy appetite for Mid Cap and Small Cap stocks. It seems unlikely,
however, that current levels of investment will be sustained whilst fundamental problems with the Japanese economy endure.
For the coming month we expect a period of consolidation ahead of Koizumi's late June anti-deflation package and the release
of first quarter GDP figures.
The yen continued to strengthen relative to the US dollar, despite intervention by the Bank of Japan. A strong yen will
undoubtedly have a negative effect on the Japanese recovery as exports to the US weaken.
Far Eastern & Equity
The weakening US dollar continues to support many of Asia's export driven economies. Korea has performed particularly well,
and appears to offer good value going forward. Hong Kong has been given a short term cyclical boost, although restructuring
remains necessary if it is to sustain its long-term competitive advantage in the global economy. In contrast, despite the supposed
bottoming of the Taiwanese economy, its equity markets continue to look over valued.
In Latin America the weak Mexican Peso, caused by negative political developments, falling oil prices and lower than expected
foreign investment levels, has raised concerns over the past month.
> With the ECB and Bank of England set to raise official interest rates in the coming months, the outlook for emerging markets
equities appears secure. Asia in particular looks set to benefit in both absolute and relative terms.
Fixed Income Markets
US treasury yields were virtually unchanged in May, however this masks the true level of volatility that was experienced. Twoyear
yields were unchanged at 3.2%, whilst Ten-year yields declined just two basis points to 5.05%. There continues to be
uncertainty surrounding the pace of the US recovery, as witnessed in the decline of several headline economic indices over the
month. Nevertheless the US consumer remains buoyant and is seen as a catalyst for increasing US growth underlined by April
sales expending at twice the forecast rate.
Yields rose across all UK bonds as the market became unsettled on both a global and domestic level. The supply of long end
bonds (those exceeding ten years) fell due to corporate holders selling off UK sterling bonds in anticipation of Britain entering
the Euro. This caused prices to fall and pushed up yields. Expectations rose that a base rate hike may take place as soon as
the Monetary Policy Committee meeting in June.
In Euroland demand for shorter dated bonds was down, as inflation unexpectedly remained above the European Central Banks
2% target, eroding expected returns. The price of two-year bonds fell the most, but supply also exceeded demand in longer
dated bonds, hence yields were up across the board. The euro rallied to 0.94 Euros to the dollar, building on Aprils recovery.
Though this was mainly due to the weakness of the US dollar against all currencies.
Bond yields in Japan were essentially unchanged in May. In contrast, the Yen has been extremely turbulent this month as
declining demand for US assets undermined the dollar. Concerns that a strengthening currency could stall an export-led
recovery caused the Bank of Japan to sell Yen and purchase US dollars. In the event Japanese Yen appreciated from 128.54
to 124.22 against the US dollar, despite intervention.
The opinions expressed here as at the previous month end are based on information that we believe to be accurate and reliable, however, these opinions may change without notice.
Although the information is believed to be reliable, Dresdner RCM Global Investors does not guarantee the timeliness, accuracy or suitability of such information in any way and anyone
who acts on the information does so entirely at their own risk.
Dresdner RCM's UK expertise is now stronger than ever…
Now that Trevor Green has joined Dresdner RCM, our UK expertise is stronger than ever. Trevor joins an established team of highly experienced UK equity managers. As part of the Allianz Dresdner Asset Management Group, Dresdner RCM's wide range of UK funds are backed by the strength and resources of Europe's largest fund manager *.
Green means go for UK growth…
Trevor Green, a UK Growth specialist, joins Dresdner RCM from Credit Suisse where he managed their UK Growth Fund to an impressive 10.97% level of return against -6.81% for the sector average, and was ranked top decile in the UK All companies sector **.
* IPE European Asset Management Survey April 2002 ** Source: S&P's Micropal, offer to offer, basic rate tax, ranked 18/263 funds, UK All Companies sector between 31/8/99 and 31/12/01.
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