By Andrew Hudson, manager of the RSA North American Trust While the US market may have experienc...
By Andrew Hudson, manager of the RSA North American Trust
While the US market may have experienced a challenging few months with lawsuits and company scrutiny for foul play, the good news is that there are continuing signs of a recovery.
Asbestos has been a major issue to hit the market and as lawsuits have increased, the market has swiftly punished any association with the substance.
Having seen asbestos producers forced into bankruptcy, the most prudent measure has been to sell known asbestos exposure. There are cases where we expect the impact to be limited however.
Viacom differs, for example, in that its asbestos involvement has long been known, it has consistently met its liabilities and its top end estimates are 50% covered by insurance.
Another significant trend has been the numerous cases focusing on accounting practises. The most notable case was obviously the collapse of Enron where the ongoing revelations and congressional investigations will keep the topic at the forefront of investors' minds for some time.
More recently, Tyco has been the subject of persistent market rumour, mainly due to short interest in the stock. When Tyco unexpectedly announced that it would demerge, the stock initially reacted positively, the share price then slid amid speculation about accounting irregularities.
In telecoms, the bankruptcy of Global Crossing has highlighted the continuing weakness of the sector and again the manipulation of accounts has come under scrutiny. As a result of this, corporate disclosure could soon become mandatory along with a number of other post-Enron requirements. The market will also be more suspicious of the large conglomerate acquisition model following Tyco. GE in particular has attracted attention as, ironically, the Tyco break-up could provide GE with a number of new acquisition opportunities.
Meanwhile, the warm winter has put more money in consumers' pockets. This has helped limit the depth of recession and resulted in a relatively strong Q4 retail performance. But just as energy prices have acted as a fiscal stimulus on the way down, the opposite will be true when the economy improves. We expect the scenario could be intensified if the US turns its war on terrorism to the oil-producing region. Washington's rhetoric is becoming increasingly aggressive and there have been suggestions that they no longer see Saudi Arabia as a viable regime.
In addition to this, post-11 September has seen a huge amount of ordinance dropped on Afghanistan. Congressional approval for increased defence spending and the Bush administration's indication that the war on terrorism will be widened would favour companies such as Lockheed Martin.
In other areas, we are also expecting to see capital expenditure recovering towards the back half of the year and that this will benefit enterprise technology stocks like Cisco Systems. While we are geared to economic recovery, we expect some consolidation until results begin to push the market higher. Management is proving to be much more conservative in its outlook and guidance than it has before.
This has created an environment where we could well see earnings figures surprise.
Signs of underlying market recovery.
Warmer winter has left consumers with money.
Inventory levels are very low.
Balance sheet contagion.
Low confidence in telecom stocks.
Risk of oil price rise as US presses on with war.
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