Chris White is a fund manager at LeggMason Investors Despite the recent bounce in equity markets...
Chris White is a fund manager at LeggMason Investors
Despite the recent bounce in equity markets post-11 September and the optimistic economic data coming through, we believe recovery in the US economy and the stock market is far from certain.
First, many leading companies are cautious in their outlook of the future and technology companies such as Intel are still reducing Capex.
Second, despite the recent strength in car and house sales, it is likely the highly indebted US consumers will start to tighten their belts. Consumers are still spending while they believe money is cheap, but it is only a matter of time before they start to cut back, especially with unemployment on the rise.
The negative wealth effects of Enron and Global Crossing will start to touch more and more people, either those who are employed by those firms or those who have invested in them. It is interesting to note that several household names such as Federal Mogul, K-Mart and Polaroid have already gone into Chapter 11.
The issue of accounting is haunting investors and leading them to ask whether they believe the figures that companies are reporting. Those with historic accounting issues such as Tyco, Williams and Cendant have already been badly affected, but investors have also questioned the accounts of General Electric ' the Queen Mother of the equity and bond markets.
As usual, the recent Federal Reserve statement, which came post-interest rate decision, gave both the bulls and the bears something to chew over ' the caveat is always that if you think you have understood Alan Greenspan, you haven't been listening to him properly. However, as a central banker, there is a tendency to talk down the economy when it is going up and talk up the economy when it is going down.
Clearly, the fate of the US market will be a key determinant of sentiment for the UK market, although the domestic economy still ploughs a steady furrow between the US and Europe.
The continued uncertain backdrop to the global economy should mean the equity income sector will continue to perform well. With the re-rating of value and the de-rating of growth in the stock market, the anomalies of the past few years have led to a more fairly valued market across the board.
However, this does not spell the end of active fund management ' quite the contrary. The market is still skewed to certain stocks and sectors and there are still opportunities in the FTSE 100 and mid-cap areas of the market.
There are three types of company that investors should now be looking for. Steady and predictable growth stocks will deserve a premium rating in an uncertain market; high yielding equities also look attractive in a low inflation, low interest rate environment of lower stock market returns; and special situations or companies which are helping themselves to increase efficiency by cost cutting and rationalisation.
However, opportunities are limited at present, and if fund managers look too hard they will compromise quality. A little bit like the man who is lost in the desert and dying of thirst, he thinks he sees the oasis, but it is only a mirage.
Active fund managers to outperform.
Low inflation, low interest rates.
Opportunities in large and mid-cap areas.
US recovery is likely to be patchy.
Historic US accounting issues.
A more fairly-valued stock market.
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