Professional investors like me make a living out of finding things to worry about. Three months ago ...
Professional investors like me make a living out of finding things to worry about. Three months ago the main risk to equity markets was perceived to be too much growth and the emergence of an inflationary threat. Today there is evidence of the slowdown we wanted but we are now worried about the effect of this on corporate profitability.
If you are going to worry about your portfolio, October is a good time to do it. Perhaps it is coincidental that many of the market plunges in recent years have taken place in the autumn. I don't think so. I believe the phenomenon can be explained by looking at seasonal changes in analysts' profit forecasts.
At the start of the year, investor reports are full of optimism; as we go into the fourth quarter of the year company analysts downgrade the profit forecast for the current year. This year has been no exception.
My view is that markets will bounce as we go into the year-end with more upside possible next year. Slower economic growth is almost always good for equity markets. It usually brings with it an increasing likelihood of interest rate cuts which equity investors really do like. Investor surveys also show us that most institutional investors have cash to commit to the market and are looking to time their purchases.
I think it highly likely that institutional investors will continue to drift their portfolios toward perceived growth stocks thus supporting valuations in the technology, media and telecom sectors. Although many fingers have been burnt over the past six months, one should not underestimate the emphasis that most fund management firms are placing on the analysis of stocks in these sectors.
The one lasting effect of the boom/bust in technology valuations earlier this year has been the dramatic increase in staff recruited to follow stocks in these sectors. At the moment it is difficult to get five fund managers around a table to hear a construction company present their strategy. In any given week, however, you can bet that a technology conference arranged by a large US or European stockbroker will be attended by upward of 200 fund managers.
Personally I feel that the technology game may be over. I am not concerned about valuations falling further, I just feel that an over or underweight position in technology, media and telecoms will not define whether or not your portfolio will perform well going forward as it has done in the past 12 months.
If I am right about this economic slowdown encouraging interest rate cuts then the bond market should perform well and if the bond market performs well then so should shares in the banking and insurance sectors. It is entirely possible that a rally in financial shares will drive the market higher over the next three months. Further consolidation in the banking sector is also on the cards given how successful the Royal Bank/NatWest merger has been for shareholders.
Nigel Dutson is fund manager at Investec Asset Management
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