The last quarter of 1999 showed exceptional equity performance in Europe on the back of a recovering ...
There are two main areas of interest - the growth in GDP is benefiting the cyclical stocks and the restructuring stories in technology and telecoms is pushing these stocks higher.
Gary Clarke, senior fund manager for European equities at HSBC, went long against the index in two areas in the last quarter - in technology and telecoms stocks, where he made the substantial part of his performance, and in basic industries, like paper and cement.
In this, he followed essentially a barbell strategy - buying strongly into short-term cyclicals and long-term growth stocks while leaving the middle range light.
Clarke is bullish about the economic health of the region. He estimates GDP growth of 3.5% in 2000 and, in this context, 1% core inflation is historically still extremely low.
Richard Urwin, head of economics for Gartmore, agrees with this GDP estimate and furthermore predicts strong profits growth - 15% this year and continued strength over the next 12-18 months. He also expects productivity to pick up as growing companies find ways to increase the efficiency of their workforce before employing more staff.
Urwin is not too concerned about inflation. Oil prices have soared so high in the last year that he feels it is unlikely that the price surge can continue.
Bond and equity markets differ slightly in their expectations, but Clarke predicts a 50 basis points (bp) rise in short-term rates in the first quarter of this year from the ECB, the Bank of England and the Fed.
Urwin thinks the markets have priced in closer to 100bps but that they are too pessimistic.
He says: "The big issue this year is how far the telecoms and technologies have gone. This big short in defensives is a risk."
Traditionally, cyclicals should have outperformed growth stocks such as telecoms but this has not happened. Urwin expects a turnaround soon, although it will not be strong.
His strategy is to start rebalancing his portfolio at some point in the next quarter or the beginning of the following. He will fund his graduated move into defensives by reducing his overweight position in banks to neutral or just underweight. This attitude is based on 'disintermediation', the potential pricing pressure in this sector as a result of the creation of low cost internet banks.
At the same time, he will concentrate on tech stocks that still have restructuring to undergo and so still have the potential for a price surge.
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