What happens in the US is the major force behind what will happen to the UK markets and economy. The...
What happens in the US is the major force behind what will happen to the UK markets and economy. The first half of the year has been weak and there is a lot of uncertainty in the market.
David Binnie, senior investment manager at Edinburgh Fund Managers, says it is a dull time and there is little news. Investors are still waiting for signs of what is going to happen in the US.
John Hatherly, head of global analysis at M&G, says: 'It depends on how strong the signs of recovery are in the US. If we see no signs of recovery there will be more bad news. There is a correlation between the US market and the UK market.'
M&G states that the main driving force in the market has been the continued pressure on economic growth. This has been combined with profit warnings from various companies such as Marconi, Regus and Hayes.
There have been lower levels of takeover activity and new issuances related to uncertainty in the environment.
Defensive stocks, such as utilities and tobacco, are outperforming at the moment. Bad economic news has continued to worsen and there is confusion in the market place.
Binnie recommends defensive stocks because people will always buy cigarettes and pharmaceuticals even when the economy is slowing.
Hatherly agrees that investors are buying more defensive areas. He recommends old economy and high yielding income funds, sectors that include mining, leisure, retail and oil and gas. 'On the opposite side, telecoms, technology and media have recorded heavy losses,' adds Hatherly.
But Binnie disagrees, saying there has been a rebound in the technology area. Technology has fallen so far and people are bottom fishing. He recommends media company Reuters as it is in a growth market, has a good management and track record and is a long-term winner.
Edinburgh Fund Managers has been switching to growth stocks for the past month. Binnie expects growth stocks will do well as the world economy picks up and recovers.
On the positive side, Hatherly says we are in a period of low interest rates, but adds that it is a two-tier market and economy. If rates stimulate growth it will be beneficial for consumers and should have a steady impact on the economy. But it is unlikely the cuts will benefit the tech sector.
Binnie believes the UK economy is fairly resilient, consumer spending is holding up, and although there has been a minor slowdown the economy is expected to recover next year.
fund manager comment: Scottish Widows
For the last 18 months, the UK equity market has traded within a range. Looking at the FTSE All Share, the index has been trapped between 5,400 and 6,600 and over the short-term a barrier is clearly apparent at 6,000. The potential upside of about 7% may not seem too exciting, especially for the index or passive investor, but for an investor in an active fund the potential is greater.
Many fund managers build portfolios from an index perspective and are not prepared to take meaningful sector or company views. Benjamin Graham in his classic text The Intelligent Investor wrote: 'To enjoy a reasonable chance for continued better than average results, the investor must follow policies which are firstly inherently sound and promising, and secondly not popular.' Rather than follow the fashion, this is a perfect time to check and recheck the assumptions supporting valuations.
Stockbrokers' analysts are classic lag indicators of value. Operational gearing in companies, where a higher-than-average proportion of revenue falls to the bottom line, frequently surprises analysts in periods of strong economic growth and leads to the momentum upgrades and euphoria that mark the end of all bull markets. Conversely, when growth is slowing, margins and cash generation come under pressure and earnings fall faster than forecast.
In the months ahead, investors will reward earnings visibility. Fund managers, first, look in detail at the fundamental drivers of share valuations, secondly, take a view on the structure of the industry and quality of management and third, accept the vulnerability of investing outwith the narrow constraints of industry weightings. Managers who do this are likely to excel and stretch the top-end of the widening spread in fund returns.
Graham Campbell is head of UK Retail in the UK Equity Team at Scottish Widows
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