The economy remains buoyant and looks set to be so for the foreseeable future. 1999 was the fourth c...
The economy remains buoyant and looks set to be so for the foreseeable future. 1999 was the fourth consecutive year of 4%-plus real GDP growth, with some forecasters now suggesting that it will even be closer to 5% than 4% this year.
Additionally, domestic demand remains robust and favourable job prospects and healthy consumer finances are fuelling strong consumer spending. However, whilst we expect a modest equity market gain over the course of the year, we also expect the recent volatility to continue during the first half.
The oil price rise has heightened inflationary concerns, although many sectors are seeing prices fall under stiff competition and consumer pressure. Core CPI inflation stood at its lowest for 35 years in 1999 and although it is set to rise this year, it should not be much above 2.5%. However, we believe that there is now increased downside risk, with monetary policy almost certain to be tightened further.
While we expect some near-term turbulence, we nonetheless anticipate solid gains in the second half of the year. We expect the leadership of the market by the technology sector to continue, helped by the Windows 2000 upgrade cycle, the continued integration of the internet for business use and the wider penetration of broadband applications.
An example of this last point is the opportunity provided by the AOL/Time Warner deal for the distribution of Time Warner audio and video content, which should attract new broadband subscribers and increase the opportunities for audio and video-based advertising.
Technology remains a key focus of investors' attention as the prospects for continued high rates of earnings growth remain strong. Within the technology sector, business-to-business appl-ications remain a major focal point, with the limited number of companies in this area continuing to see strong demand as high valuations reflect the relative shortage of expertise.
Other areas which we expect to benefit include those in the service sector such as cable television, media and advertising, whilst cyclicals may enjoy some strength during the first half of the year as expectations for global growth continue to mount. Conversely financials could experience further weakness amid expectations of higher interest rates.
The outlook for consumer staples such as drugs and healthcare is also poor due to political factors, given that we are in an election year and that these items are on the congressional agenda. Large overseas earners such as Coca-Cola are likely to suffer from price deflation, while consumer cyclicals such as retailers may underperform if the Fed's desire to slow economic growth succeeds, as consumers will curtail their spending.
Overall, we anticipate further gains to be driven by continued strong earnings growth.
Katharine Garrett-Cox is fund manager at Hill Samuel Asset Management
Follows McVey's resignation
Schroders and Aviva Investors
LightTower Partners, Seneca Partners and Unicorn AM
Integration with Money Dashboard
View from the front row