For sometime now the US economy has posed the world's other markets and investors with their biggest...
For sometime now the US economy has posed the world's other markets and investors with their biggest question. 'Will Alan Greenspan and the Federal Reserve be able to successfully engineer a soft-landing for the US economy?'
Finally, we believe that our long held faith is being rewarded. The first real signs of an economic slowdown are beginning to emerge with indications that the US consumer is at last starting to reign in spending.
Following the tech, media and telecom rollover of early March, the market has broadened out considerably. In a period of such wild fluctuation in stock and sector performance, the defensive label has its attractions.
However, the difficulty for income fund managers is that many of the traditionally high yielding defensive sectors have proved considerably less defensive than the label would imply. Typically, defensive stocks such as the big blue chip names within the food producers sector can no longer be relied upon to produce modest but reliable growth. The current low inflation environment means that the consumer is king and consequently, there is little scope for price increases within many sectors. This has led to substantial pressure being applied to margins.
On a relative basis many companies have traded on an undemanding rating, but in view of their diminished prospects, they still offer little value.
It is, therefore, necessary to seek opportunities within other sectors outside the traditional remit of the income fund manager. An example can be found within the telecoms sector where a company such as Cable & Wireless may look fully valued in a market context, but still represents good value given the enormous growth potential of the industry in which it operates.
With the global economy effectively in the midst of a critically important turning point as growth slows to a more sustainable level, it has inevitably proved difficult to make big sector calls.
One traditionally strong income fund area that offers attractive opportunities in the current environment is the electricity sector. Our preferences here are for those stocks that despite being on very modest relative valuations, offer upside from the earnings growth of aggressive cost-cutting programmes, the integration of new acquisitions and the expansion of peripheral activities.
Witness this particularly in regard to Scottish Power and Scottish and Southern Energy who have diversified successfully into the telecoms field.
Looking ahead, the secular forces of globalisation coupled with the deflationary forces brought about via the Internet, the outlook for global inflation remains benign. Coupled with the aforementioned signs of economic slowdown in the US we are able to remain confident for the future.
Mike Felton is director of
Royal & SunAlliance Investments
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