The slowing US economy will play its part but the main driver for the UK is consumer confidence, says Anthony Nutt
It has been a turbulent start to the year to say the least, and stock markets across the world continue to suffer in the aftermath of the technology fallout. The question is whether or not the UK market can put the past couple of years behind it and surge forward into a sustained bull run?
The FTSE has recovered from its March falls, which saw the index plunge to its lowest levels for two years, but the outlook is still clouded in doubt.
As the reporting season approaches, further volatility can be expected as further profit warnings from companies, telecom stocks in particular, are revealed. Many earnings are still too highly rated and P/E ratios are also still high ' it is understandable that the market is reluctant to accept them.
The telecom sector continues to be plagued with problems. Its plight was highlighted in March by the sudden profit warning announced by Cable & Wireless. It was a severe shock and its shares went into freefall and plunged 20% immediately. Telecom companies paid millions of pounds for the 3G mobile phone licences and investors are now questioning whether it was all worth it.
More recently, UK stocks such as Marconi have seen their share price fluctuate off the back of the recent bad news from Cisco Systems, the world's largest network equipment company and giant phone maker Lucent.
Cisco, for example, is warning of a sharp fall in revenues and earnings ' as much as 30%. It is also being forced to cut 25% of its workforce
The UK cannot expect to escape the impact of the slowing economy in the US and we are still feeling the effects of the Nasdaq plunges of the past few months. Its economy is slowing to worrying levels and Greenspan has once again cut rates to help stave off a recession. Despite this, there are some interesting opportunities in the UK.
The economy is not in as bad a situation as the US: it is stable and the low inflation environment coupled with stable growth should remain intact.
Consumer confidence is also relatively high. Look at the recent performance of the retailers. Even Marks & Spencer, which has fallen from grace in the last three or so years, has staged a mini recovery since the turn of the year. Not many people would have predicted a year ago that retailers would be outperforming today.
At Jupiter, we are staying focused on the small and medium companies. It is a strategy that has served us well in the past, while the largest stocks are struggling to deliver decent earnings levels.
Having said that, portfolios are relatively defensive ' it is a position we feel comfortable with at the moment. Cash, property and fixed interest weightings are overweight.
Any recovery is going slowly ' we do not believe there will be a v-shaped recovery and are positioning ourselves for two years down the line.
But it is not all doom and gloom. Opportunities arise when investors are panicked into selling shares, and there is now a great chance of picking up some stocks that offer good long-term value. Yes, there are companies that have made significant downgrades, but many of those companies are in sectors that have been outperforming. We are now starting to shift some of our cash positions into equities.
The falls in the past year in many stocks can be blamed on the falls in the technology laden-Nasdaq index.
But you have to remember that much of the bad news is coming from companies who had small revenues and produced little or no profit.
Their market caps soared from nowhere and subsequently became a major part of the index. Many of these companies, which are currently household names will eventually fall by the wayside.
Ultimately, many stocks have been dragged down with the pessimistic sentiment. But sentiment does not turn good companies into bad ones overnight. Negative sentiment, for example, has seen media companies fall back. Capital Radio's share price recently hit a two-year low.
However, the UK has some strong media companies and the sector is a legitimate place to invest. There is some real value in stocks such as EMAP, which is currently on a rating it had five years ago, while Capital Radio, Carlton and Granada look interesting.
Levels of advertising growth are decent and share prices have come back to attractive levels. There are also some sound publishers such as Reed and Pearson.
The healthcare sector is also attractive as it is an area unaffected by the economy. Whatever the economy is doing, people still need medicines and stocks such as Elan and Shires should do well.
The manufacturing growth service sector is another that could offer a few positive surprises. BBA and British Aerospace have suffered in the past three years, but they are on very low ratings and have good growth characteristics.
The drinks industry continues to look attractive. The jury is still out on Bass, which has just bought 79 Posthouse hotels in a £810m deal, trebling its UK outlets. But I like what they have done. I also believe Scottish & Newcastle is a stock worth investing in.
It is certainly vulnerable to a takeover bid, perhaps from someone like South African breweries. The valuation is cheap and there is good upside ' if investors fail to realise it I'm sure another company will do and take it over.
Banks offer investors hope and also double up as a defensive play. I particularly favour the mortgage banks such as Northern Rock and Alliance & Leicester, which are producing good returns despite intense competition in the sector.
Consolidation continues to play its part and many stocks are benefiting from targeting their customer base more competently. Whether the Abbey National/Lloyds TSB merger goes ahead, we will have to wait and see. If Abbey merges, I will probably keep it because it will be a cheap way of owning the new vehicle ' whatever it may be.
The financial sector will remain defensive as long as we do not get an economic downturn from here. Should we get more bearish, issues associated with bad debt may arise and my stance will change.
But while I am positive on the bank plays, I am cautious on the insurance sector. We have already seen profit warnings from Zurich Financial Services, which is also being forced to shed jobs.
Going forward, the overriding restraining issue is the US economy. Much of it will come down to investor confidence. But whatever happens across the Atlantic, I feel good about the UK market. It has a consistent performance on all fronts ' inflation and growth ' to pull it through.
Some 18 months ago you could have picked any number of stocks in a sector and come up with the winners. That is no longer the case ' today, it is all about being a stockpicker.
The UK will be able to put the past couple of years behind it, but it will not happen this week or next, or even in the next six months.
There are gains to be made, but we are in a bear market and investors need to show a degree of patience.
Investors hoping to generate returns of 15% a year are in for a rude awakening. With inflation around the 2% level, returns will be more modest in the short-term.
l Stock markets continue to suffer in aftermath of tech fallout.
l Many stocks have been dragged down by pessimistic sentiment.
l UK economy not in as bad a state as US.
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