Sector allocation is becoming more important for managed funds as the importance of the technology t...
Sector allocation is becoming more important for managed funds as the importance of the technology theme continues to grow. Ken Forman, head of strategy at Standard Life Investments, says: "Sectors tend to move with the local markets, not globally, but we are starting to see some uniformity in technology. Country allocation is still more important in constructing a portfolio even though sector correlation is increasing."
Sarah Arkle, head of equities and managed funds at Threadneedle, believes it is becoming increasingly inappropriate to look at asset allocation completely at a geographic level. With the increase in cross border mergers and acquisitions over the past two years, there has been a shift in global sectors, she says.
She adds: "At the moment it is more important to be in the right sectors as the global economy picks up. We think inflation will be below consensus estimates and we will stay in a low inflation environment.
"In looking at the global sector mix of our managed funds we are overweight telecoms and oil while neutral on technology and pharmaceuticals. Geographically we are slightly underweight the US and overweight Europe, Japan, Asia and Latin America."
At the same time, Scottish Equitable has moved to a neutral position in bonds, equities and cash, amid nervousness about rising global inflation.
Alistair Byrne, head of investment strategy at Scottish Equitable, says the US and to a lesser extent the UK, have current economic environments which could stoke inflation to inflation.
He says: "There are strong levels of economic growth and low unemployment. Usually when we have this scenario, inflation is likely to pick up. That is not happening in the data and some people argue it is because of the effect of technology or that global economies are changing. We are concerned inflation will pick up and therefore have adopted a neutral weighting toward bonds, equities and cash."
Byrne says his geographic outlook for interest rates and earnings growth had led him to overweight Europe and underweight the UK.
He says: "We have favoured continental Europe for two main reasons. The first is that interest rates, at 3%, are low and we do not expect them to increase significantly. They may increase to 3.5% in the second half of 2000 but the short term outlook is that interest rates will remain stable. Additionally company earnings growth in Europe is strong."
The UK scenario is different, with interest rate increases expected early in the year and a lower level of earnings growth than in Europe.
Byrne says: "We expect interest rates to increase from 5.5% to 6.5%, and most of the increases will be in the first half of the year. This is detrimental to equities. As far as profit growth is concerned, it is unlikely to be more than 10% in the UK.
He is neutral on the US, saying the market, although strong, appears overvalued, driven by technology stocks. Scottish Equitable is neutral on Asia and Japan. Byrne says this is even though the economies in these areas are recovering. In Japan, the market has been driven by foreign buying and domestic institutions are not prepared to fill in the demand.
Standard Life Investments believes the outlook for UK, Europe and Japan is good but thinks the US is likely to underperform over the next year. Forman says: "The market is overvalued and the dollar is vulnerable to a fall compared to the euro and yen. We have a negative view on the dollar. In looking at sectors, cyclicals appear to have more pricing power at the moment."
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