By Jason Whittaker, manger of the Cazenove North American fund Many of the comfortable assumpti...
Many of the comfortable assumptions that had existed before 11 September in the Western world have had to change and it will take time before the full ramifications of this become apparent. From an investment perspective, we cannot wait for clarity to materialise. We need to work with the information we have now and this involves going back to basics.
While still unquantifiable, it is possible the risk premium of equity markets may need to rise. Although delayed, all things being equal, there will still be a recovery in 2002. We expect the broad trends that existed before the tragedy to re-assert themselves.
In terms of the US stock market, we had already witnessed a sharp correction before 11 September and the immediate decline when the market re-opened was understandable. Since then, there has been a sizeable rally, however. The S&P 500 index was 17.9% off its post-11 September low at the time of writing ' above pre-crisis levels. Who would have believed it a few months ago that the World Trade Centre would be destroyed, anthrax would be used as a weapon for the first time on US civilians and that the US would be at 'war' ' and that the markets would actually be higher?
Is there better fundamental news elsewhere that the market is paying more attention to, or is this simply volatility caused by high liquidity levels and short covering? As always, there are two schools of thought. Bulls point to hints that the economic environment may be beginning to revive ' not many, and certainly no concrete proof, but hints nonetheless. These include record October auto sales. This was initially attributed to the 0% financing deals offered by many US car manufacturers, but many foreign car makers also had record months without offering any unusual financing deals.
Bulls argue this indicates that consumers are spending some of the money they are gaining from mortgage refinancing and that rate cuts are therefore working. In addition, consumer confidence, while not strong, is apparent, and other anecdotal signs are positive, such as a small recovery in IT budgets predicted for next year by the Gartner Group.
Conversely, bears argue that this rally is because of excess liquidity in the markets, coupled with better news from Afghanistan.
They say the markets are way ahead of fundamentals and are overvalued. They expect the market to decline as continuing poor economic news overshadows the current spate of optimism.
Our view tilts slightly toward the bull camp. While we are wary of valuations, we believe the aggressive monetary and fiscal stance in the US will tip the balance and that we will see a meaningful rebound in growth in the second half of next year. Equity markets should anticipate this recovery by several months. However, high levels of volatility are likely to continue and a re-test of September lows is not completely out of the question.
We intend to remain nimble to take advantage of this volatility and will attempt to add value through stock selection by sticking mostly to higher-quality names while avoiding stocks with excessive valuations.
Very high liquidity levels.
Loose fiscal policy at present.
Market expectations are low.
No concrete signs of recovery anywhere.
Valuations not compelling.
Uncertainty threatens consumer confidence.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till