While Morley believes equities are oversold from a technical perspective, we recognise the early par...
While Morley believes equities are oversold from a technical perspective, we recognise the early part of 2008 is likely to be a difficult period for shares. The risks are particularly acute given that global earnings are approximately 50% above their long-term trend. As a consequence our portfolios started 2008 with an overall defensive bias.
UK shares have lost significant ground since the turn of the year, with the FTSE 100 and FTSE All-Share indices both down 13% to 22 January. Mining, retailers and banks have been among the worst-hit sectors.
Starting 2008, our preferred sectors include pharmaceuticals and telecoms. Areas such as tobacco, consumer goods manufacturers and food retailers have also been favoured in view of the fact earnings should be comparatively unaffected by any downturn in discretionary consumer spending. Nonetheless, valuations within some of these sectors, notably tobacco, are beginning to look stretched.
We envisage further downward pressure on commodity prices and do not concur with those who suggest emerging economies can withstand events in the West. Given this, we have a strong preference for oil and gas explorers relative to miners. And while bank shares have probably seen the worst, we expect a continued drip-feed of bad news, and therefore have a preference for life assurers and other financials.
For some time we have positioned our main UK funds defensively in anticipation of a worsening economic climate. Recent economic data and declining earnings estimates continue to justify this stance. However, the severity of share price falls at the beginning of 2008 has undermined this position to some extent and we are seeking to switch funds into some of the more cyclical areas of the market.
Overall, equities have reacted poorly to the intensifying global credit problems, the US housing market crash and the knock-on effects to the general economy, and have shown only a reasonably muted response to the US rate cut on 22 January. With many markets oversold, valuations are now highly attractive against bonds, although it should be noted that earnings are expected to fall from current high levels.
- Given market uncertainty, our attention is focused on relative market trades, with UK, US and Asia ex-Japan favoured over continental Europe and emerging markets;
- Japanese shares should be assisted by attractive valuations and positive institutional flows;
- Mervyn Douglas, fund manager, Aviva Morley UK Equity Focus fund and the Norwich UK Equity Focus fund.
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