Investors are discounting a short, sharp V-shaped recovery in the US economy and in corporate profit...
Investors are discounting a short, sharp V-shaped recovery in the US economy and in corporate profits. This optimism is founded on the significant easing in monetary and fiscal stimulus delivered by the US authorities, which has been further augmented by a sharp fall in the oil price. Any resultant recovery in the US is expected to quickly spread to the global economy.
The markets seem to be 'priced for perfection'. Their recent action is very reminiscent of the end of 1999. High beta tech stocks are leading the markets in a powerful liquidity-fuelled rally, with investors climbing the 'wall of worry'.
This is despite the general consensus that valuations in the technology area are over-stretched, even on estimated 2003/04 earnings let alone those for 2002. Earnings are expected to rebound sharply towards the end of next year, but only from very depressed levels. Matters are made worse by the fact there will be no Y2K-related technology-spending binge this time around.
Equity valuations, not just in the technology area, are up with events given a far from certain short-term outlook. Recent economic figures, primarily from the US, have shown some stabilisation, which should be expected after the dramatic weakness. The next few months will show whether the rebound is sustainable.
The other markets are following Wall Street's lead. The US indices are making new highs for the rally off 21 September lows. We have yet to see any meaningful correction or consolidation. Picking the short-term top in this kind of market is difficult particularly given the seasonal influences. But the higher the markets rise, the higher the odds that equities will experience a more meaningful correction in the coming weeks and months. A well-diversified equity portfolio is therefore called for with a good mixture of defensive and economically-sensitive shares and a low exposure to technology.
Nick Lee is investment director of Ashburton
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