Greenspan has ensured an exciting start to 2001. Fund managers had little chance to alter portfolios...
Greenspan has ensured an exciting start to 2001. Fund managers had little chance to alter portfolios away from value defensives towards cyclicals and growth before he surprised the markets with an early cut in interest rates.
We believe that just as some of the bullish sentiment in the last couple of years ignored the negatives, the prevailing mood of bearishness at the end of the year ignored the positives.
The US is clearly well placed to offer further policy boosts through interest rate cuts should these be required.
Investors now know that Greenspan has always been very focused on growth and is fully aware of the need to maintain confidence in order to prevent negative sentiment on the economy from becoming self-fulfilling. Furthermore, President Bush's proposed tax cuts should give a further boost to the economy. Overall, we still believe the US should avoid a hard landing.
Unlike the US, where economic data is clearly pointing to a slowdown, UK data remains generally benign. We still expect UK GDP to grow by 3% in 2001 and believe current market expectations about the extent of the fall in UK interest rates are too optimistic. We would be surprised if base rates reached 5.5% by year-end.
Further stimuli in the form of extra Government spending will help underpin the UK economy, with further spending over the next few years indicated in the comprehensive spending review. Given that there is also a large current surplus, estimated at £10bn, tax cuts in a pre-Election Budget are also possible.
As the year progresses and interest rates continue to fall in the US, we expect to have more opportunities for picking up the cyclical shares that investors have been deserting over the past year.
These are now offering more interesting value. The move into cyclical shares is likely to be one of the key calls for fund managers in 2001.
But, unlike in 1998 when interest rates last started falling when the US and UK economies were strong, this time we do expect some nasty profit warnings as the slowdown in the US affects operationally-geared companies. Last year has acted as a reminder to investors that technology has a strong cyclical element in the demand profile for products and services. With capex budgets under pressure, 2001 is likely to remain challenging, but we are looking for opportunities to acquire decent franchises at more attractive valuations. But TMT overall does not yet offer compelling value.
There are also plenty of opportunities in old growth areas, such as asset managers where growth rates and earnings remain strong. Although volatility will continue to be a feature of the market for the next few months, this does present plenty of opportunities for managers to buy good stocks that have been oversold.
Tim Russell is head of UK equities at HSBC Asset Management
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