In the last six months, Alan Greenspan's reinflation of global liquidity (or more specifically the U...
In the last six months, Alan Greenspan's reinflation of global liquidity (or more specifically the US stock market), has fed its way through to the real economy. Clearly Europe's core has started to pick up, but the markets have been alluding to this trend for some time.
The 30-year German Bund has backed up to a 5.7% yield, a level last seen in January 1998, while commodity prices have risen steadily over the last six months. Oil has climbed from $9.20 to $20 per barrel, while nickel has risen 48%, zinc 16.3% and aluminium 12.
The markets have had to ask serious questions of inflation and in so doing there has been a marked shift in investor patterns. For the first time in over five years value stocks have significantly outperformed growth stocks over a meaningful period, giving way to a broader market.
This partly has to do with a long overdue correction of the extreme valuations many growth stocks reached relative to their value counterparts. In this low inflationary environment these growth stocks had been bid up to heady multiples as a result of their scarcity value.
Two things have changed. Apart from a short break in the autumn of 1998, new companies have been brought to the market at an alarming rate. In 1998 and 1999 no less than 130 companies have been brought to the Neuer Markt, 65% of which have come in the last seven months alone.
Secondly, the high multiples investors were willing to pay had been supported by valuation models that had discounted future earnings streams. As inflationary fears have returned and the discount rate has risen, these high valuations have lost some of their support. For instance, the Neuer Markt, which rose by 190% in 1998, has stalled during 1999 and fallen back by some 20% since its peak in early March.
We have sold some of our longer duration assets in favour of selectively more cyclical plays. Purchases were made in paper, pulp, oil and oil services. After several years of depressed demand, and in particular the severity of the downturn caused by the Asian crisis, the supply side of many commodities has been scaled back.
We have not made these purchases just for a demand-led pick-up, but rather for what has been a supply side fix. Certainly OPEC has solved this problem for oil, but in paper too there has been a sea change in the way companies have been managed. Rather than run the mills for volume, as has historically been the case, the producers have for the first time focused on prices.
As demand starts to pick up, there will be tremendous leverage for such industries. In particular we have bought paper and pulp stocks like Stora, UPM Kymmene and Assi Doman, as well as oil and oil service companies like Elf and Coflexip.
I am still optimistic about new technologies, but the markets and economies are in a state of transition and portfolios need to reflect this
Andrew Gibbs is a fund manager at M&G.
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