World stock markets at last appear to be building themselves a platform for recovery. Their anticipa...
World stock markets at last appear to be building themselves a platform for recovery. Their anticipated outperformance in 2002 has prompted us to strengthen our position in equities at the expense of bonds.
Over the first quarter, we reduced the fixed interest weighting of our Hallmark Growth Portfolio Fund from about 13% to 10% and we will be looking to reduce this still further as the equity rally gathers pace.
On a global level, we favour Southeast Asia, which was the best performing major equity market area in the first quarter, rising a sterling-adjusted 14.3%. Asian economies are starting to recover strongly, as last year's downturn in global demand is now translating into extensive spare capacity.
Low inflation and interest rates have stabilised the region's currencies, helping to build a basis from which Asia will be able to establish a degree of independence from the overbearing influence of the US economy. Equities are still cheap in relative terms and our exposure to the region therefore will remain overweight.
The western economies traded modestly higher over the quarter, with the US rising 2.6% and the UK and Europe both returning 2.3% in sterling terms. Over the the period, we moved further overweight in these markets on the expectation of the improving economic outlook fuelling the momentum seen in the fourth quarter of 2001.
At the end of March, we added a small weighting in emerging markets through the purchase of the Templeton Emerging Investment Trust. Emerging markets only slightly lagged Southeast Asia in the first quarter and we expect further strong performance in 2002, as valuations are more attractive than in other developed markets. Although we remain dubious as to the sustainability of the recovery in Japan, we are however prepared to maintain our neutral weighting against Hallmark Growth's benchmark as a contrarian play against depressed investor sentiment towards the market.
Within equities, we will maintain our preference for economically sensitive stocks over growth plays. Despite having been wrong-footed by the outperformance of consumer cyclicals and defensives in quarter one, we will remain underweight in these areas, as history shows that these equity groups underperform in recovery phases.
In sector terms, we favour chemicals, basic resources and services that, as classic early cyclicals, will be among the first areas of the market to reflect the improved economic outlook. While we feel that technology, telecoms, insurance and healthcare will remain weak, we will be seeking out turnaround stories within these sectors. BT, for example, is showing signs of recovery, thanks to changed management and a new broad band strategy.
Profits are the key driver of stock prices and we expect positive earnings surprises to push equity markets higher towards the end of the third quarter. In the meantime, we will have to look beyond a summer of modest profits to identify those companies with sufficient pricing power and market dominance to deliver reliably high revenue streams.
Equities set to outperform.
Southeast Asia offers value.
Cyclicals look attractive.
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