Few investors have made money in equities recently. The price volatility has provided us with opport...
Few investors have made money in equities recently. The price volatility has provided us with opportunities but balanced portfolios have seen big winners negated by the losers.
If we had switched from growth stocks like technology to defensives in March, we could have doubled our money, but the index lost ground because of concerns over lower corporate earnings and the de-rating of growth stocks. The current market is the reverse image of last year's, with investors are seeking refuge in safer stocks.
The worlds' major economies are slowing rapidly, led by the US. Consumer confidence is dissipating alongside the Nasdaq and talk is of recession. The first half of 2001 could see virtually no growth at all. Hopefully there are several positives and only one negative for equities to come out of this gloom. The negative is clear, earnings will continue to surprise on the downside. Investment levels have the extra technology costs, and input costs are rising on higher raw material prices.
The positives are that interest rates will be coming down, more rapidly and sooner than expected. Bond yields have been declining, signalling this, and lower rates are usually good for equities. Secondly, despite the frenetic economic activity, coupled with the high oil price, inflation has remained subdued. As growth slows, inflation will undershoot the Treasury's forecast of 2%. Thirdly, valuations have obviously come back with the market. The trick is to know what a share price is discounting, and it is interesting to see how some prices are now bouncing on profits warnings.
Valuations generally are supportive at these levels, even allowing for sectoral downgrades. The market multiple of 18 and yield of 2.6% are not outrageous given the economic backdrop of little inflation. Finally, one of the strongest drivers will continue to be corporate activity. The urge to merge in the big global sectors remains, with even the banks now joining the fun. The weaker companies are not being baled out by inflation and need to cut costs to keep profits rising.
Which sectors most appeal for 2001? We have seen how divergent the returns have been and I don't see next year as any different. I recommend a combination of growth and cyclicality while staying with 'safer' companies in these categories. The cyclicals could include the late cycle mining stocks, builders and transport. In the latter two there are some cheap multiples, high yields and well above market average profits growth.
For growth sectors, stay with the outsourcing beneficiaries, some media stocks and a basket of tech companies where management and balance sheets are strong. Pharmaceuticals, oils and telecoms are alright but not cheap and I would expect the market to be looking elsewhere in a year's time. Forecasts see the market 10-15% higher next year. It could be better than that.
Peter Seabrook is director of UK Equities, SG Asset Management
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