slow recovery is expected as US directors sell three company shares for every one they buy
SG Asset Management is sounding a strong note of caution on the prospects for US equities on the back of aggregate directors share dealings and the likelihood of a slow recovery.
Alan Torry, who manages the SocGen American Growth unit trust with Sam Mercer-Nairne, said directors of US companies are, on aggregate, selling three shares in their own companies for every one they buy, indicating they are not anticipating strong performance from US stocks.
This contrasts with the autumn of 2001 when US share prices were marked down in the aftermath of the terrorist attacks in the US and directors were buying on aggregate two shares in their own company for every one they sold.
Torry said: 'Directors of US companies should know better than anyone about what is going on in their companies and in October they were buying their stock aggressively. However, there is a large amount of liquidity sitting on the sidelines and also the key for market direction is earnings revisions. When analysts are heavily marking down their earnings expectations, markets tend to fall and vice versa.'
He added that the economic recovery in the US is appearing earlier than expected and said that some in the market are anticipating positive growth for the first quarter of this year. SGAM believes US rates have hit a low although Torry does not expect them to climb back up sharply. Even so, he is not expecting a strong economic recovery as he believes consumer spending and capital utilisation will not be strong drivers this time around.
Torry said: 'The consumer has held up remarkably well but the current situation does not have the makings of a consumer boom going forward. There is not going to be the turnaround that we have seen in previous economic recoveries.'
Spare capacity in the US economy is at a 20-year high, according to SGAM, which believes many businesses in the US will not be moving as early as they would previously have done to increase their capacity through investment.
Torry said: 'These two drivers of economic recovery, consumer spending and capital utilisation, are going to be much milder on this occasion. But to the extent that, to get an increase in growth, companies will not have to spend money on capital plant means we will get tremendous, continuing downward pressure on prices and I believe we will see inflation of well below 1% in the near future.'
On the UK market, Adrian Gosden, who manages SocGen UK Income with Nicola Horlick, said the FTSE 100 has seen poor performance, despite the relative strength of the UK economy, because of its international nature. He pointed out that only 30% of the sales of FTSE 100 companies come from the UK and that these companies have had their prospects held back by the slow global economy. Gosden added that many of the better stock opportunities are to be found in the mid and small-cap areas of the market, which are more likely to benefit from the UK economy's relative strength ' around 75% of sales of small-cap companies come from the UK.
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