The MFS Emerging Growth fund has reduced its cash weighting from 16% to 10% on the back of a bullish...
The MFS Emerging Growth fund has reduced its cash weighting from 16% to 10% on the back of a bullish attitude to the US economy and to small caps.
US growth looks set to continue at strength and the small cap market will be one of the biggest winners as its cycle is on the up; this small cap bull run could last for years rather than months, according to fund manager Don Pitcher.
Small caps have spent many years languishing in the doldrums. Pitcher said: "In May 1996 the perception of higher interest rates entered the stock market. When people are scared they only buy the big cap blue chips."
Then in October 1997, the Asian crisis pushed people still further towards large caps. As a result they became relatively overpriced.
He said: "The valuation argument is now strong enough to make money come in. In 1999, smaller companies outperformed their larger counterparts. I think we're in a new bull market."
The relative underperformance of small caps up until last year has been a buying opportunity for Pitcher. He said: "Stocks had never been so cheap. But investors didn't want to hear that.
"They wanted the easy buy. A year ago you could have could have got stocks on the cheap if you had the guts. Now it's too late for the easy money, but they are still cheap."
The volatility of the equity markets has being caused by market nervousness over US inflation and interest rates. Pitcher believes these fears are groundless.
He said: "I've been bullish on inflation since 1982 and I'm still bullish."
Pitcher doesn't lose much sleep over the macroeconomic health of the US. There are some inflationary pressures, especially wage growth, he says, but this has been counteracted by productivity increases.
S&P 500 earnings figures, after many years of consistently high growth, actually dropped by 2.1% in 1998.
In 1999, however, the figure rose by 14% and MFS gives a conservative 10% estimate for this year. Productivity has therefore not yet reached its limit.
Pitcher thinks that interest rates have pretty much peaked. The market volatility is happening because the market doesn't believe this yet.
The day before the most recent Federal Reserve meeting, he said: "No matter what happens tomorrow, there will be a bond man, wringing his hands, pointing to some obscure figure and saying it's negative."
Money flows into mutual funds look healthy for this year. In 1993 a record was set as $130.6bn flowed into US equity mutual funds.
This shot up to above $220bn in 1996 and 1997, before sliding back down to $157bn in 1998, to the consternation of the fund management industry.
However, since then the figures have been strong, 1999 showing a pick up to $187.5bn, while by the end of June this year, this figure had already been beaten.
Pitcher said: "To sum it all up, life is good. There is healthy economy, low inflation, stable interest rates and ongoing earnings growth. I'm looking for another classic rally in the fourth quarter of this year."
Paul Bruns and Elaine Parkes
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