Concerns about the valuation levels of growth stocks is in the minds of many global equity managers ...
Concerns about the valuation levels of growth stocks is in the minds of many global equity managers in the short term, according to the latest research from Global Fund Analysis.
Nils Taube, manager of GAM Worldwide, said: "I am worried about the froth created in stock markets and valuations around the world. I am also worried in the medium-term about inflation.
"Because commodity prices have been weak and manufacturing prices have remained low, the perception is that there is very little inflation.
"However, there is enormous inflation in the prices of services and the value of assets, and because of the tight US labour market, people are saying they can only find unskilled labour.
"Inflation measures all reflect the price of goods rather than the price of services. There is a lot of hidden inflation that will drive interest rates up further and snuff out speculation in the market.
"This is already reflected in bond prices. The long bond in the US stands at 6.3%, while it is at 4.3% in the UK."
Jacob van Duijn, chief investment officer at Robeco, said: "Much of my worry centres around the valuation levels of growth sectors, which outperformed once again in 1999. The key question is, when will we see a shift away from highly-valued growth stocks towards economic cyclicals?
"The real dilemma is that the sectors you like are in areas that are highly valued, yet you cannot afford to be out of them. The Nasdaq Index recently went up 15% in a matter of weeks. Arguing that something was expensive would have cost you a lot of performance.
"Looking forward, markets could stall during February. I am prepared for a less ebullient year. There is a lot of turn-of-the-century optimism in the markets but all the stories about the 'new economy' are also in the prices."
Michael Ericksen, fund manager at Capital International, commented: "My worry at present is about the pockets of overvaluation and how they will be corrected. Internet and technology stocks and the mega caps are quite rich. The gap has got to close.
"History says that this will not happen in a gentle fashion but that there will be some nasty surprises. The danger is that this will affect a whole swathe of companies."
Others appear more sanguine, however. Richard Skelt, manager of Fidelity's International fund, said: "Markets have been exceptionally strong in general this year. It has been a long time since we have seen a sustained period of underperformance.
"We have seen short periods when the market has underperformed, such as the third quarter of 1998. It was painful, but it was short.
"In 1999 there was not a lot of weakness, and after a few years of strong performance you start to look nervously over your shoulder. That said, there is not a lot out there to suggest that it might all go horribly wrong. If areas such as technology do come down, there will not necessarily be a knock-on effect.
"The market has almost two sides to it at present. There is the more traditional business side and the highly speculative side. A lot of people that are active in the speculative element are not the people in the day-to-day business of institutional fund management.
"There is a strong retail presence and there is evidence to suggest that these people also continue to invest for the longer term."
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