The final quarter of 1999 seems a sensible moment to indulge in a spot of fortune telling and hard a...
The final quarter of 1999 seems a sensible moment to indulge in a spot of fortune telling and hard analysis
There is undoubtedly a feeling in the markets of 'you've never had it so difficult'. Who can honestly say that a year ago they were urging us all to buy Japanese Smaller Companies, UK mid cap stocks, and the Pacific
Which investors were canny enough to spot that for the first time in ages, 1999 was the year of the contrarian, with money being made by investing in the dismal performers of the previous year
If only we had all been clever enough to fill portfolios with funds investing in Japan, where the average gain year to date has been 61.9%, according to S&P Micropal, as opposed to the more conventional US (up 7.4%) or Europe Excluding UK (down 1.4
In the UK, the average smaller company fund's gain was 29.9%, yet most investors preferred to have only a small exposure to this area
Could a similar contrarian approach work for 2000? As a first step in the process, let's take a look at the dogs of 1999. Global bonds are certainly worth a look, with the average fund here having fallen by 7.6% year to date
Other fixed interest sectors have fared badly too. Next on the list will be continental Europe and the US, while with the FTSE Index sharply underperforming the wider market (up 2.4 % as opposed to the All Share rise of 5.5 %), UK funds which overweight blue chips are surely worthy of a look
If only life were that simple. There is too much uncertainty to take such easy short cuts
Among the key issues is the outlook for US interest rates is a third rise imminent, and what will this do to sentiment and liquidity on Wall Street
The leading indicators in the UK appear to be telling us that we are in for a burst of economic growth, with higher bond yields and interest rates appearing inevitable in the short term at least
This means that equities could struggle. The recovery in Japan and the Pacific markets has stalled, while the unexpected strength of the yen versus the dollar is causing concern. As in 1987, the US trade deficit looks scary
Against such a background, it is hardly surprising that equities both at home and overseas have struggled over the summer
There is a general reluctance to take big bets, and as a result, markets are likely to trade sideways for the remainder of the year. Yes, there could be a pre-Millennium rally, but I wouldn't bet the house on it
Looking through the near term fog, however, and trying to see beyond the coming rate rises, I would make the following predictions
Bonds are oversold, not least in the UK, and will rally in response to continued subdued inflation. The US equity market is stretched, and will mark time until bonds rally and the deficit improves
The pace of economic recovery in the Asian region will favour the dynamic Pacific ex Japan markets, which offer opportunity from their current levels
Japan needs to consolidate its recent gains, while Continental Europe should now start to perform on the back of low interest rates and restructuring activity
In the UK, we expect to see robust growth together with low inflation, an ideal environment for quality companies
The themes of growth versus value and large versus small now feel rather played out, ensuring that 2000 will be a year for the true stockpicker. It is likely that funds with a rigorous yet flexible approach will be favoured
Harry Morgan is head of private clients at Edinburgh Fund Managers
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