The stock market turbulence of the past few weeks certainly gives a reason for caution. But the econ...
The stock market turbulence of the past few weeks certainly gives a reason for caution. But the economy is in a stable, low inflation growth environment, which should remain intact, buoyed by more interest rate cuts.
There are obvious concerns that the UK will be affected by the US economic slowdown. Many UK firms are global players and will subsequently be affected by default. The US is slowing to worrying levels and new figures show the average household's net worth has fallen for the first time in 55 years. While it is not official, the US is technically already in a recession.
The key to successful performance will come from picking the right stocks to flourish in the changing economic environment.
We are bearish in several areas and have serious doubts for the long-term growth prospects of the telecoms sector. The profit warning announced by Cable & Wireless last month brought its plight home. It was a severe shock and its shares went into free-fall, plunging 20% immediately. Telecoms companies paid millions of pounds for the 3G mobile phone licences and investors are now questioning whether it was all worth it.
I also have doubts about the prospect for technology stocks, as I do not believe UK technology companies are as good as their US counterparts. The UK has Psion and BATM, but they are up against Microsoft and Cisco and I do not think they can compete.
I have also cut back my exposure to banks. Barclays and the Royal Bank of Scotland have had tremendous runs, but the economic climate is sensitive and could go against them.
All is not doom and gloom. The uncertainty is making people panic into selling decent shares, which is presenting some interesting opportunities. But investors are not going to get returns of 15% a year, as they have done in the past. With inflation about the 2% level, returns will be modest.
On a positive note, the UK has some strong media companies. Levels of advertising growth are decent and share prices have come back to attractive levels. Strong firms include Granada, Carlton and Reuters. There are also some sound publishers, such as Reed and Pearson.
The healthcare sector, excluding 'blue sky' biotech stocks, is also attractive. It is an area unaffected by the economy and companies such as Elan and Shire should do well. The manufacturing growth service sector is another area that could surprise a few people. BBA and British Aerospace have suffered in the past three years but they are on low ratings and have good growth characteristics.
Eighteen months ago you could have picked any number of stocks in a sector and come up with the winners. But today there are as many losers as there are winners. It is all about being a stock picker. There are gains to be made, but any recovery will not be V-shaped. We are in a bear market and investors need to show a degree of patience.
Kenneth Warnock is manager of the Jupiter UK special situations fund
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