Fund manager's comment/Logie Cassells
Gerrard's Hallmark Funds team has a long-term mantra: the strength of the US and other economies greatly depends on the ongoing health of the 'baby boomer' generation, born between 1935 and 1962. We believe its spending pulse is far more robust than people believe and is not set to peak in the US until 2009, and then in Europe about three years later.
One of our favourite gauges, in keeping in tune with US baby-boomers' spend, is the demand for the motorcycles of Harley-Davidson, otherwise known as the 'Hog Indicator'. The company's latest results indicate all is well and demand remains so high for the $23,000 machine that would-be rebels have to wait three months before they take to the open highway to play out their Easy Rider fantasies.
Harley's cult status among baby boomers ” motorcyclists' spend peaks between the ages of 47 and 50 ” has left it untouched by the American economy's recent troubles. This adds to evidence that the slowdown is business-led, resulting from an inventory overhang. The Hog's 2000 results surpassed market expectations with earnings up 31% and sales up 18%.
While General Motors, Ford and Daimler Chrysler may be cutting output in the current year, Harley is boosting its 2001 production target by 2,000 bikes to 229,000. At nearly $47, the shares are not cheap at 35 times forecasted earnings (against a five-year average of 30) and have rebounded by a third since April. However, US demographics suggest that long-term demand should remain strong until 2009 to 2011.
We have a positive view toward the direction of markets. Unlike the dramatic recovery of October 1998, this rebound is more likely to be U-shaped and will continue to be punctuated by volatility. We do not believe that markets will race away until late 2002 or early 2003. This is when stronger demographic growth and the next phase of the technology cycle will kick-start the next chapter of the information age. Until then, an active rather than an index-tracking style will prosper.
The largest area for concern, and the factor preventing a sharp rebound to new highs, continues to be market sentiment. This has yet to capitulate to the dour levels seen in the early 1980s and 1990s, however. The rise in cash balances in the portfolios of the American Association of Individual Investors from a low of 11% in March 1998 to the current level of 27% suggests bad news has already been discounted.
Managing expectations in the next 12 to 18 months is therefore critical. Remember, the average return on equities since 1982 is about 14%, a far better benchmark to use than the five-year average return of 25%. And for all you Hog-lovers out there, remember to place your orders early to avoid disappointment.
Market favours active management.
Demographics strong until 2009.
New technology leaders emerging.
£300bn of liabilities
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