Charles Rawson, fund manager at Exeter Asset Management Prior to and immediately after 11 Septemb...
Charles Rawson, fund manager at Exeter Asset Management
Prior to and immediately after 11 September, market performance reflected global recession fears.
These fears were justified as the world's three largest economies, the US, Japan and Germany, dipped into recession in the course of the year. The UK managed to sustain reasonable growth however, driven by robust consumer demand. UK retail sales were buoyant and house prices rose sharply in 2001.
The massive monetary easing, particularly after 11 September, fuelled a liquidity-driven rally in the closing months of 2001. Emerging markets shrugged off Argentina's deepening crisis and disappointment with Japan's economic performance to post large gains, led by Korea and Taiwan.
In the period up to 11 September, defensive sectors like food, pharmaceuticals, tobacco and utilities outperformed, whereas growth sectors like technology and telecoms slumped. The last quarter saw the reverse with technology stocks racing away leaving everything else trailing.
Little wonder that top-rated sovereign and corporate bonds were among the best performing asset classes in every region in 2001, as central banks slashed interest rates and demand collapsed. The terrorist attacks merely served to increase investors' risk aversion, a trend in evidence ever since the tech bubble burst in 2000.
Looking ahead, optimism must be tempered with caution while current geopolitical and economic uncertainties persist. The main issues will be the extent and durability of economic recovery and the outlook for corporate earnings. There have been signs that recovery is round the corner with the contraction in the US economy, particularly in manufacturing, turning round and business confidence appearing to stabilise in Germany.
Taking this into account, equities should give the best returns within broad asset classes in 2002: the aggressive monetary easing last year and current level of interest rates should help the global economy to recover, ultimately driving stock markets higher in 2002. Having said this, lower nominal returns are likely in future in most equity markets compared to the exceptional returns achieved in the previous two decades.
In an environment of low inflation and stable conditions over the next few years, bonds should also produce relatively attractive returns.
My final observation is that investment trusts afford a good opportunity to gain exposure to global equities, particularly if markets continue to recover.
Overall, 2001 was, as the HSBC investment trust research team put it, an 'annus horribilis' for equity investors in general, and for the investment trust sector in particular. The latter dropped more than 21% versus 13.9% for the FTSE World Index and 13.3% for the FTSE All-Share (£ total returns). It was the worst year for the sector since 1990.
History tends to show that the best time to invest is rarely the most popular time. The average discount to net asset value is currently around 12.5%.
Equities likely to be the best asset in 2002.
Wider discounts on some investment trusts.
Signs of economic recovery in the US.
Equity markets to remain volatile.
Interest rates may increase.
Lower nominal returns expected.
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