Outlook for the US remains uncertain. Helen Mackin, head of investment communications at Threadneedl...
Outlook for the US remains uncertain. Helen Mackin, head of investment communications at Threadneedle, says: 'We think over the short term the market will remain volatile. There has been a number of high profile companies that have had profit downgrades.'
Chris Tracey, global strategist at JP Morgan Fleming, says: 'The macroeconomic background remains unclear and personal spending continues to be robust, despite rising unemployment.
'The continued uncertainty over the economy mitigates against an overweight position in high beta stocks. We are overweight in consumer staples and defensives, with a bias throughout our US portfolios for those companies that enjoy strong franchises within the market,' adds Tracey.
Threadneedle is overweight in healthcare as it is a defensive stock and will do well in times of an economic slowdown.
Mackin continues: 'We are overweight in domestic growth as consumer confidence has held up well and we do not expect it to fall. We are also overweight in energy because of the power shortages. Energy prices have been supported by supply constraints and rising oil prices.'
At Threadneedle, underweight positions include telecoms and banking. In the telecoms sector, companies still have a high amount of debt on their balance sheets. Banks are underperforming because inflation is high and bond yields are rising.
In the medium term, the Fed has cut rates and an efficient rebound in earnings growth of around 10% is expected next year.
Threadneedle stock picks companies with good pricing power, a good management record, those which do not have a high amount of debt and operate in niche markets.
Mackin recommends hotel chain Starwood as this market has consolidated and will benefit from the anticipated upturn.
She also recommends AOL Time Warner as it has a chance to expand globally and still has good earnings growth. The completion of the merger gives a good subscriber base.
With regards to the economy, Mackin believes that it is the bottom of the interest rate cycle although she says we may see a further 25 point cut. She expects the recent cuts should start to have an impact. 'We should see some sort of stabilisation and upturn in growth next year,' says Mackin. 'Consumer spending remains robust and it is expected the tax refunds will be spent rather than saved.'
JP Morgan Fleming holds the same opinion. Tracey says: 'The continuation of consumer spending, which is critical if the economy is to avoid recession, appears achievable on the recent evidence that significant monetary easing has led to an improvement in consumer confidence.'
However, without signs that earnings visibility has returned there will be little confidence in any estimates in the third quarter.
fund manager comment: Barings
Most investors probably do not realise the US equity market recorded a positive, albeit modest, advance during the second quarter. The gain was easy to miss amidst the negative economic reports in the US.
The positive developments during the quarter ' continued aggressive monetary easing by the Fed and President Bush's success with tax-relief ' are not to be ignored. Most S&P sectors advanced for the quarter, led by the economically sensitive stocks. The battered tech sector rose slightly more than the index. The market is starting to anticipate the earnings recovery.
We continue to believe that economic progress will be evident by late in the second half and have been surprised by the severity of the current slowdown, and it seems likely that upturn will be both later and milder than thought three months ago. However, powerful monetary and fiscal stimulus is underway, with the benefit to be felt late this year. The last six months have seen the most aggressive easing of the Greenspan era, more rate reductions are likely, and tax rates have been reduced. Economic growth and corporate profits are likely to bottom in the third.
Despite the trend of negative economic and profits news during the second quarter, investors must remember the equity market is a discounting mechanism, and begin to anticipate the better earnings outlook ahead. Twelve months after a period of rate cuts, the market has nearly always been positive and the best returns often found in the sectors of consumer discretionary, financials, industrials, and technology. From a bottom-up view, this is where the most attractively valued growth stocks are to be found.
Christopher Lees is investment manager for US Equities at Baring Asset Management
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