The big issue for investors in 2002 is when and how the US-led recovery in the world economy feeds t...
The big issue for investors in 2002 is when and how the US-led recovery in the world economy feeds through to corporate results.
The pattern of economic data remains generally encouraging, with the momentum of recovery being sustained in the US and signs of life multiplying elsewhere, notably in Europe.
However, the recent testimony from US Fed chairman Alan Greenspan was quite cautious. The upside from his comments, however, was that, with inflationary pressures under control, the Fed is in no hurry to tighten monetary policy. The Governor of the Bank of England is currently dropping similar hints. That should put a floor under bonds and ensure that bond/equity valuations cease to diverge further.
Comments from the corporate sector still present a mixed pattern. While the balance of first-quarter reports from the US was slightly above expectations, there were plenty of exceptions from CEOs who saw few hints of an improving business climate.
Some companies still face near-term sluggishness in revenues but most have continued to restructure, leaving them well placed to rebuild margins and surprise on the upside with profits recoveries when business conditions are healthier.
There are certainly sectoral patterns. Telecoms and technology still present problems but variations within all sectors are just as marked, implying no let-up in the degree of polarisation and unpredictability we have come to accept.
All this implies investors should proceed with care, balancing the obvious opportunities an improving business climate brings with the need to spot potential accidents.
Our approach to managing global funds takes more note of sectors and themes than of geography. This means thematic funds, like those focusing on global healthcare and technology, are inherently overweight in the US, not because we are bullish on that market but because the country is the global centre for these sectors.
In these cases, we seek to apply a policy of forward-looking value, identifying stocks whose valuations do not fully reflect their long-term prospects. In broad terms, valuations in Eastern markets, especially the Pacific Basin ex-Japan, are more attractive than their western counterparts.
But there are plenty of anomalies everywhere, which can repay the efforts of detection. We run the M&G Managed Growth Fund on the principle that holders require a broader geographical and sectoral spread than a fund investing primarily in the UK can provide.
We are generally most positive on mining (but not oils, which are up with events), staples and consumer cyclicals. Healthcare appears more attractive than pharmaceutical lead- ers, although recent weakness in the latter is leading us to consider moving our current underweight position to neutral.
On valuation grounds, financial sectors, approximately 25% of the world index, look appealing. Banks are generally good value, with trading prospects set to benefit from the decline in bad debts that accompanies an upswing in the business cycle.
Momentum of global recovery still building.
Interest rate expectations lower.
Themes/sectors to remain divergent.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till