fidelity's senior portfolio strategist john ross says longest bear market since 1929 has exposed value within companies for stockpickers
John Ross, senior portfolio strategist at Fidelity, told delegates at the group's roadshow that markets at best offer reasonable value, but stockpicking opportunities have proliferated.
Ross said that the current bear market, which has been the longest and deepest since 1929, has exposed a lot of value in companies in the markets, even though headline indices do not look cheap.
Speaking in Edinburgh last week Ross painted a gloomy picture and said: 'The US economy is barely expanding. One reason why growth appears to be so strong in the 1970s is because inflation was so high. If we look at other economies, it is a similar picture. The UK is weak.'
'In Europe, Germany appears to be on the brink of a recession. And of course Japan is in recession. Not surprisingly, the European, US and UK markets have started to anticipate more interest rate cuts. Secondly, inflation is very low compared to rates seen over the last 30 years.'
He said this has led to fears of deflation, which Fidelity believes is unfounded.
'Against this economic background, the earnings outlook has deteriorated. In aggregate, more companies are seeing their profit forecasts revised down than are seeing them revised up. Profits are still growing but not as much as had been expected.'
'Price earnings ratios in the US, Europe and the UK are, on the whole, not cheap. But we would say they have become at least reasonable and on a stock-by-stock basis we can find cheap stocks.'
'If we compared share prices to cashflow, which we believe provides a better picture of company profitability ' share valuations look cheap in the UK, Europe and Japan. So a good deal of the bad news is being discounted in share prices.'
Providing an autopsy of the current bear market, Ross said: 'This has been an unusual bear market, not only because it is the longest and deepest slide in equities since 1929, but because we seem to have got into this situation by degree.'
It was built up in a number of stages, he said. First there was the massive ramp up in technology share prices, then there was the TMT bust.
Investors, then confident of a rapid rebound in TMT stocks, suffered a second major downleg.
Worse was to come, Ross said: 'Still investors thought this was probably just temporary and to be expected. The rest of the market, certainly in the UK, seemed to be okay. But then, 2001 US First Quarter earnings announcements were below expectations and the market fell sharply.'
Even that did not end the slide. The Fed then cut interest rates and investors thought the economy would pick up, leading to a short-lived market rally.
'But this didn't last long. News on the economy was not getting better. And then the terrorist attack on 11 September set the market into a tailspin. Markets fell sharply and the sages came out and said everything would be okay. The Fed cut rates a second time.
'However, the market was hit again when it was discovered Enron had falsified its accounts. Accounting scandals continued and soon investors were asking, 'How much worse can it get?''
He said: 'It is now the second longest and deepest this century.'
Since the peak of markets in 2000, the US has fallen almost 50%, the UK 45%, Germany 64% and Japan 56%. Since 2000, bonds and cash have outperformed equities by a huge margin. Bond yields are at 40- year lows, he added.
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