By David Watson, manager of the ABN AMRO North American Growth Fund The key to global equity mar...
By David Watson, manager of the ABN AMRO North American Growth Fund
The key to global equity markets is often dependent upon the activity and direction of the US market, which accounts for nine of the 10 largest companies in the world by market capitalisation.
Since 11 September, US investors have been focusing on the state of the market in order to determine the direction of their own investments. The weight of money applied to regular investment programmes such as 401K pension schemes means that the stock market remains high on the list of interest for much of middle America.
The US market was already less than effervescent before 11 September, as the economy appeared to be heading for a downturn. The excesses of the late 90s can largely be traced to over-investing by industry, which had access to cheap capital. The resultant over-capacity has caused a significant slowdown although the prospects looking forward appear brighter as inventories decline.
The depth and duration of an average bear market is a decline of between 30% over a 14-month period. The current decline is in excess from peak to trough and is about 24 months in duration since the technology bubble burst.
All is not doom and gloom. The leading economic indicators have risen consecutively for the last three months. During December, the number of employee lay-offs decreased and the number of hours worked increased.
Alan Greenspan has recently confirmed that interest rates should remain at 1.75%, which suggests that the current low level is providing the necessary support to the economy.
In short, we believe that the market has bottomed. The continuing negative sentiment suggests that a V-shaped recovery is unlikely to happen. Instead, we expect a 'saucer' shape to materialise. This is not as bad as it might seem. Saucers are smaller than plates and the downside remains limited.
As a house, we believe that the slope of recovery is largely dependent upon consumer spending power and activity. We do not think corporations will increase capital expenditures without an upturn in corporate profits.
And we must see an increase in consumer activity before corporate profits improve. During this interim choppy time, we have therefore concentrated exposure towards consumer staples and healthcare, where profit growth is least affected by cyclical elements.
Given that we think the economy is close to returning to a growth mode, we are keeping our eyes trained on those sectors that will benefit from a recovery. These would include technology and growth cyclicals.
While we have exposure to growth cyclical companies such as MMM, Caterpillar, and UPS, we remain concerned with the valuation levels of many technology companies.
As we have stated before, price competition in this sector arising from excess capacity suggests caution for investors. We currently favour technology companies that have niche markets (Electronic Arts) or dominate their market (EDS, Paychex). Commodity-type technology companies (chips, PCs, servers, memory, etc) may be especially vulnerable to price competition.
Leading economic indicators rising.
Interest rates to remain at current level.
Economy close to returning to growth.
Tech stocks vulnerable to competition.
Excess capacity remains in many tech areas.
Corporations unlikely to increase spending.
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress