Fund manager's comment/John Chatfeild-Roberts
The Nasdaq may have bounced back above the 2000 level in recent weeks but the big issue is still whether the US will avoid a recession. We are relatively sanguine because there is little doubt the Fed is doing everything in its powers to stop the economy from falling off a cliff. It has cut interest rates five times since the turn of the year and Greenspan will keep cutting rates for as long as it takes to get the economy on track.
But if there is one dark cloud on the horizon in the US it is the energy crisis in California ' home of Silicon Valley and the world's sixth largest economy. This summer, it is expected to have several blackouts that will shut down industrial plants and air-conditioning systems and this could have a devastating affect on its economy. There is also a growing petrol crisis: pump prices in Florida have shot up by about 20% in the past couple of months.
Last month, President Bush voiced his concerns about the crisis and there are real fears that if the problem is not resolved it could ultimately have a negative effect on the stock market.
However, we are more bullish on the US than we are on Europe, where the recovery seems to be stalling. The ECB has been slow in cutting interest rates and is reluctant to indicate whether more cuts are on the cards. The introduction of euro notes and coins on the continent next year is also set to cause uncertainty.
But on the positive side, the potential changes of corporation tax in a number of countries could prove attractive. Such tax is due to drop to below 40% in Germany. France could soon follow suit.
In the Far East, Japan cannot be ignored ' after all, it is still one of the world's biggest economies. There are signs that companies are beginning to show greater interest in shareholder value. Profits are starting to outstrip sales, which shows that cost savings are being made. But you have to be selective in your choice of stocks and it is no good merely following an index where there are as many bad companies as good.
On an individual sector basis, we are bullish on financials where many companies are cheaply rated. Favourable trends include the continued worldwide consolidation of banking and insurance companies and the growth of long-term savings and pension markets. Financials also tend to perform well against a backdrop of falling interest rates.
There are also opportunities in the healthcare sector. Again the sector has wobbled and funds have fallen by as much as 30% in the past six months. But the long-term rationale for investing in healthcare has not changed ' changing demographics and people living longer ' and it may be a good time to start feeding money in.
Going forward, investors should realise they are not going to get the super high returns they may have got used to over the past five years. Nevertheless, high, single-digit returns are certainly achievable. We believe the current stock market landscape favours genuine stock pickers and that it is such funds that will give the added value you are looking for.
US cutting interest rates.
Benign economic growth in the UK.
Stocks are cheaply rated.
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation