New economy stocks in the US have enjoyed a revival of late, with the Nasdaq Composite up by 18...
New economy stocks in the US have enjoyed a revival of late, with the Nasdaq Composite up by 18.6% in dollar terms from the beginning of the year to 20 June against a 10.5% rise in the S&P 500.
Looking at the breakdown of sectors for the S&P index over the month to 24 June, the computer and electronic retail sector was the best performer, with a return of 18.13% in dollar terms.
According to David Currie, investment manager at Edinburgh Fund Managers, the rally in these sectors was caused by positive earnings expectations.
He says: 'US markets have been led higher by consumer, technology and financial sectors over the past month and investors anxiously await the next results season, which is due to start in early July. For once, earnings expectations are actually believed to be in line with reality.'
The stock market increase has also been supported by positive economic news, says Tom Elliott, strategist at JP Morgan Fleming Asset Management. He adds: 'Investors were encouraged by some better-than-expected economic news, including a strong rebound in manufacturing activity in New York during May, a rise in industrial production and a buoyant housing market.
'The general tone of the data has helped investors forget the weakness of previous weeks and rekindle a bullish spirit on Wall Street.'
However, Currie warns it is not certain yet whether this rally is a short-lived phenomenon or whether it signifies the US economy is experiencing a post-war recovery. He says over the coming weeks, the market will focus on economic data to determine whether the rally stems from a recovery.
Currie feels there are some indications of a potential US recovery, such as capital expenditure in technology increasing in the region.
He says GDP numbers to the end of May show technology investment is growing at an annualised rate of 11% and the first three months of the year represented the fifth consecutive quarter of growth. However, he adds, although comments from technology companies suggest demand is picking up, investment in technology is at the expense of other capital expenditure.
One reason the recent US market rally might be short-lived is due to the impact from the rate cut on the 25 June. The equity and bonds market had already priced in a rate cut ahead of the Fed's decision, but still the S&P 500 dropped slightly in response to the 25bp cut. The index closed on 25 June down 1% from the previous day, however the dollar gained against the euro, reaching a five-week high on the back of the Federal Reserve's announcement.
Currie is avoiding any market sensitive companies in the fund. He is overweight in the financials sector and favours CIT, a commercial finance company, because he believes it is working hard to bring down costs on capital and is trading at a discount.
The fund is also overweight housebuilders because the sector has strong demand and supply and there has been a market shift towards large, quoted housebuilders.
Potential for a US recovery.
Firms expectations may be in line with reality.
Corporate expenditure on tech has increased.
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