Last year was characterised by a slow start as the global financial system and economy recovered, bu...
Last year was characterised by a slow start as the global financial system and economy recovered, but by the year-end activity was accelerating. This year the opposite scenario is more likely. The peak rate of activity should have passed in the first quarter, with the second quarter providing greater evidence that the tightening monetary stance, started in summer 1999, is causing growth to slow.
Especially important is when the financial markets will begin to start discounting the peak of the interest rate cycle. With a degree of uncertainty surrounding the pace of US growth, markets are likely to remain volatile as investors track data for evidence as to whether the world economy will achieve a hard or soft landing.
In the UK, after nine months of tightening monetary policy, signs of an economic slowdown are starting to emerge and following a long run of underperformance, the UK market is starting to look better value on an international basis. The likely catalyst for improved performance will be the prospect of an earlier peak in the UK interest rate cycle.
The US market is likely to remain volatile as investors question the extent to which the Fed is ahead or behind the curve. We expect the blanket buying and selling of sectors to diminish as expectations revert to more reasonable levels. Within sectors, however, we expect divergence to rise.
The successful outcome of the Vodafone/Mannesmann take-over battle has been a significant positive for European equities. So too was Mannesmann's attempt to persuade the market of its investment case, rather than hide behind legislative barriers. This should open the gates for further hostile M&A activity. On a 12-month view, the best investment opportunities lie in the old economy. Exporters should also benefit from the weakness of the euro.
In Japan, a number of developments are lending support to equities. These include corporate restructuring, changes to accounting, the maturing of 10-year postal savings accounts, and the introduction of US-style real estate investment trusts.
In Asia, the most compelling opportunities are still concentrated in companies supplying electronic components to the world's telecom and tech industries. Despite our emphasis on these stocks, we are looking for domestic opportunities, particularly in countries such as Korea, where the recovery is on a firm footing and employment levels are rising. Overall we continue to prefer north Asia, including China, over the smaller markets as these provide better access to technology companies.
Markets are expected to remain exceptionally volatile until the direction of the US economy becomes clearer. In an environment where any stock that falls out of favour is likely to be savagely de-rated, individual stock characteristics will polarise performance.
Robert Shelton is manager of the Newton Managed Fund
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