Fund manager's comment/Jonathan Cobb
UK base rates have fallen from 6% to 5% since the start of the year but so far the London equity market has been unimpressed. A double-digit negative return is not the stuff to fire investors' enthusiasm, so are there any grounds for optimism looking further ahead?
The UK market has laboured against the gloom affecting other parts of the world, but the prospects for the UK economy look encouraging. The buoyancy of the housing market and high street are evidence of the robustness of the consumer. As this is challenged by a slowdown in employment and wage growth, government spending ' which is now growing at its fastest rate since 1997 ' should offset slower conditions in the private sector.
Monetary policy also remains accommodating and inflation is at low levels. After the excesses of the technology bubble, the market now looks attractively valued against corporate earnings expectations that have held up well in a global context.
Assuming that dividends now grow in line with trend GDP then the real return offered by equities, presently about 5%, look attractive relative to other asset classes such as index- linked gilts. However, the question of where to invest in a market that has witnessed dramatic falls in the value of many of its constituents is harder to address.
Much has been written about the unwinding of the speculative excesses in the technology sector. Yet old economy hubris should be tempered by recalling, for example, that the value of Railtrack has this year been written down to a mere fraction of the replacement value of the infrastructure it represents. Other former stalwarts such as retailer Kingfisher and business outsourcer Hays have also continued their rapid fall from grace.
So, after the catastrophic falls of the past 18 months, perhaps now is the time to turn attention back to the technology sector. Certainly, in areas such as telecoms, the equity market has written off a large proportion of the value of the incremental investment that was made by industry participants in the late 1990s. Yet the excess of physical infrastructure (such as fibre optic cable beneath the ground) remains.
The achievement of an acceptable return on this will therefore be difficult, even as demand recovers. But capital investment in this area will take time to recover, which is why it is too early to expect a sharp rebound in the fortunes of companies such as Marconi ' even after their recent battering.
Nonetheless, there are many strong franchises in the broader technology spectrum that we expect to recover in due course. The impetus of companies to update and improve their business processes and customer management systems is still as relevant today as it was at the height of the technology boom.
As new economy helps old economy to recover, real value will be created to the mutual benefit of both.
Jonathan Cobb is a uK fund manager at Standard Life Investments
• UK market looks good value.
• GDP supported by govt expenditure.
• Opportunities despite poor tech backdrop.
• Excesses will take time to work off.
• UK remains sensitive to slowdown.
• Further corporate disappointemnt likely.
An ambitious objective
'Something completely new'
'Illusion of control'
Reasons to be cheerful
Total investment reaches £9m