The major theme in the market seems to be that 'there are no themes'. In a market that has been used...
The major theme in the market seems to be that 'there are no themes'. In a market that has been used to strong and prolonged trends over the past few years, whether it has been financials, tech or momentum investing, fund managers are complaining that there does not seem to be much to latch on to at the present time.
One wheel has already come off the technology bandwagon and there is no raison d'être to invest on a momentum basis in a market that has only had sideways movement for the past two years.
In the UK, economic growth has been robust over the past few years, albeit without the same productivity gains that we have seen in the US. However, there are signs the domestic economy is slowing down and that the interest cycle may be close to its peak. Of course, the creation of the MPC by the present Government should lead to a smoother economic cycle and an end to the cycle of boom/bust and stop/go economics. Interest rate decisions are now out of the hands of politicians, which has to be in the long-term interests of the economy.
So, if the macroeconomic backdrop looks favourable, let's examine the outlook for the key sectors of the market. If we are in a smoother economic cycle, banks will not have to worry about large bad debt provisions and write-offs, so the worst excesses of the downturn will be averted. Additionally, with the interest rate cycle moving in favour of the financials, we should expect little surprise with regard to earnings forecasts. The threat to margins from the internet banks and increasing competition should be slower than many analysts expect and there is still considerable scope for further mergers and acquisitions activity later this year.
Elsewhere in financials, we have seen consolidation in the insurance sector, which has helped to support valuations. In pharmaceuticals, the picture is more mixed.
The sector has been a strong performer over the past few months as stock market weakness has highlighted the defensive attractions of the global pharmaceuticals sector. However, we remain cautious on the outlook for the sector.
In the technology, media and telecoms sector, valuations have been savaged over the past few months. This should not be regarded as a great surprise as the sectors valuations had reached unsustainable highs and this was exacerbated by downgrades to advertising expectations and fears of pricing pressure in telecoms. Long term opportunities in this sector remain undiminished although in the short term, the outlook is less certain.
Elsewhere in the market, there are potential for returns in less exciting sectors. Both Whitbread and Scottish and Newcastle look undervalued on most criteria and are two of a number of stocks currently benefiting from a move towards defensive sectors.
Chris White is senior investment manager at LeggMason Investors
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