Many commentators sense that a turning point has been reached for financial markets, but lack of con...
Many commentators sense that a turning point has been reached for financial markets, but lack of conviction (or courage) prevents most from nailing their flag to the masthead as to its future direction.
Over the past six months we have witnessed a truly extraordinary global surge in tech-related sectors (TMT). During this phase two themes dominated the thoughts of investors: that technology holds the key to future growth and that traditional industries were particularly vulnerable to the intensifying pressures of the new commercial world.
Crude as these generalisations may be, at least the classification of stocks into 'old' or 'new' economy categories represents a victory of sorts for the thematic over the geographical approach to global investing. That is a reasonable starting point from which to assess the near term outlook.
The strength of global economic growth is an accepted fact but the implications of fundamental changes arising from the evolving business environment is yet to fully register. Globalisation, increasing competition and the internet are all conspiring to push down elements of main inflation indices.
This could more than neutralise the impact of faster macro-economic growth, enabling short term interest rates in the US and Europe to peak later this year - rather earlier than might otherwise have been expected. This suspicion has already filtered through to bond markets, which have been surprisingly stable since the turn of the year against a background of aggressive central bank tightening.
A firmer bond background would be supportive of equities as well as providing an appropriate home, especially for income-seeking investors. On the other hand the loss of pricing power is undermining the fortunes of those companies with limited organic sales growth prospects which formerly relied on it to generate higher profits.
Some degree of rotation towards old economy sectors was inevitable after the extreme polarisation since autumn 1999. Many stocks of this type are still ludicrously underpriced. This worldwide reaction is now a month old, with Nasdaq, Techmark and other related international indices all peaking within days. We believe this trend has further to run.
In our view, technology-related stocks are likely to face an unsettled period, due to a less favourable supply/demand position and seasonal weakness, before rallying by the final quarter of the year. Investors are seemingly in a more sceptical frame of mind, less willing to trust in momentum and more aware of the value of taking a critical view. This more selective approach encompasses both new and old economy companies. It will still enable shares in tech companies with strong franchises to perform well and raise new investment capital, though, inevitably, valuations are likely to trimmed back a little. Equally, the loss of pricing power will limit the scope of the old economy rally.
The winners in this category will be those companies able to demonstrate enduring competitive strengths in the new world. A particularly worthwhile category for investors are businesses that can effectively use technology to develop and sustain market strengths. The most successful will justify significant upward re-rating, often from depressed base levels.
There is a wide range of opportunities across the sectoral spectrum and on a global basis. This offers unparalleled opportunities for investors prepared to use their critical skills to good effect.
John Hatherly, head of UK research, M&G Group
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