The positive effect of a global recovery and the inherent strength of the US economy outweigh any neg...
In an environment that remains steadfastly low inflationary, productivity gains remain the primary way for companies to increase revenue. Technology spend is therefore the key to continued corporate success and this in turn fuels the booming technology sector.
Nick Roe-Ely, Tilney's director of US investments, says: "If you are a company in older-style industries - auto parts, for example - labour is the biggest cost. So, given the pricing pressure, you must invest in technology."
The pressure is also on fund managers to ensure they profit from this environment. Lucy Bartlett, head of Schroders' US desk, says: "This year everybody expects technology to do well, so it's going to be harder for technology stocks to surprise on the upside."
Paradoxically, the continuing success of technology will help control demand. As investors become more discerning technology investors, this opens up the market to non-tech stocks.
Many new sectors could start to see recovery as the set of performance stocks broadens; communications services, and even financials, are picking up.
The only big worry is if GDP continues rising until inflation starts seriously increasing. However, some say that even if interest rates did squeeze older parts of the economy, these companies would use the various strategies at their disposal to free up cash flow and invest in technology. This would actually push productivity up.
Roe-Ely puts corporate productivity improvement at 3% for this year. This should help deaden consumer price levels, which he estimates will be 2.4% this year, rising to a still modest 2.7% in 2001. This should discourage the Federal Reserve System from upping the Federal funds rate unduly.
Inflation-adjusted GDP is going to hit 3.25% growth in 2000, following estimates as high as 3.6%. Roe-Ely regards this as a soft landing for the US.
Roe-Ely says: "The finances of the federal government are in good shape, with a budget surplus set to hit $160bn through this year. The underpinnings are favourable.
"That increases the propensity to spend. Combined with good liquidity, corporations have a great environment."
Roe-Ely thinks surging oil prices will have to rise substantially further before posing any serious threat. Barring a serious international crisis, the US should retain a strong economy and a profitable market for the foreseeable future.
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