For many of us, the tsunami disaster in Asia has been at the forefront of our minds, but while it is...
For many of us, the tsunami disaster in Asia has been at the forefront of our minds, but while it is clearly tragic in human terms, the world's response to it could ultimately provide strong support for the region and its commercial development, something that the region's equity markets already appear to have recognised.
With this in mind, we believe the main threats to another positive year for equity markets remain political or economic shocks that could undermine the support we see coming from continuing growth worldwide.
Looking back, one of the principal reasons for last year's slowdown in global growth was the rise in the oil price. However, at around $40, it is well below the $50-plus level reached in October and we believe the disappearance of various speculative influences that initially fuelled its rise will lead to price stability, if not further weakness. And although headline inflation rates in the major economies rose as a result of the high oil price, prices generally have not come under upward pressure as other influences on inflation, such as wage growth, remained subdued.
We expect this to continue and, against this background of stable, trend-rate growth and interest rates worldwide likely to stay relatively low, we anticipate corporate earnings growth will remain solid, allowing global equity markets to generate modestly positive returns for investors this year.
With reference to the UK, investors' preoccupation with various macro themes was the key driver behind UK equities' performance for much of 2004, particularly earlier in the year. Dollar weakness, the Madrid bombing, rising US interest rates and escalating oil prices generally drove investors into 'defensive' sectors despite the robust backdrop for profits. Such a high degree of risk aversion would normally have prompted investors to turn away from equities towards bonds.
However, bonds were, and still are, expensive by historical standards and investors focused their attention instead on more defensive 'bond-like' equities. This resulted in the upward re-rating and significant outperformance of utilities and tobacco, for example, for much of the year.
We expect this to change going into 2005. In our view, investors in many of these lower growth defensive stocks, most notably in beverages and food, are not being adequately compensated for the risk to earnings at current valuations.
Conversely, we believe the most rewarding opportunities lie in selected media and tech stocks, which are likely to be the prime beneficiaries of the pick-up in discretionary corporate capital expenditure that
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