How far will interest rates rise? Is the market vulnerable to a fall in Wall Street? Will the narrow...
How far will interest rates rise? Is the market vulnerable to a fall in Wall Street? Will the narrow group of technology shares continue to rise? Is there any prospect of making money in the 'old economy' stocks? These are some of the typical questions that concern investors. Respectively, the answers are: less than the market expects, yes, maybe and yes.
While interest rates are expected to rise in the short term, in both the US and UK, prospects for a continuation of low inflation still look promising. The twin influences of intense global competition and the productivity enhancements of information technology are inhibiting the ability of both governments and corporations to behave in an inflationary manner. The main means of increasing corporate profits will be by increasing productivity through the application of IT. There is strong anecdotal evidence that this is the experience in certain sectors of the UK economy, to some extent replicating the experience which has been driving the US economy for the last decade.
Essentially, investment should be directed towards sectors that are expected to grow revenues ahead of static or falling prices. For example, the telecoms sector will continue to be in a favourable position, while banks will continue to be at a disadvantage. While technology stocks will continue to be a significant constituent of stock markets, some of these companies which are valued at over one hundred times earnings will not be able to compound earnings at the implied rate of 50% or greater, as competitors' behaviour will reduce these returns. This is a particular risk in the UK, where the valuations placed on many technology related shares are at premiums to their US or European competitors, merely because of scarcity.
This year, the TechMARK 100 Index has risen by over 50% compared to a small fall in the FTA All-Share, similar to the difference between the S&P 500 and Nasdaq indices. This may continue as long as there is both liquidity and confidence. The market still offers investment opportunities, particularly among traditional companies that could exploit their market positions through the development of an internet strategy. Additionally, the wholesale rush into the 'new economy shares has left many valuations anomalies which other buyers, whether trade or venture capitalists, will exploit.
Currently, the Jupiter UK Growth Fund has 50% invested in small and medium-sized companies. The fund is overweight in housebuilders, whose profits are growing at rates in excess of 10% but are valued at multiples of six or less. These shares should outperform once the market perceives a peak in interest rates. The fund's largest holding is Celltech, which will be among the beneficiaries of the potential arising from developments in gene technology.
Edward Bonham Carter is chief investment officer at Jupiter
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