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Asset Management Strategies Alaric Nightingale speaks to our panel of asset managers and concludes there could be an end to the current bout of interest rate cuts by autumn For those among you who house the bulk of your assets in cash, the past half year will have been painful. Returns on deposit accounts have been dwindling, and investors seeking to maintain returns have either had to put money into products like bonds or plunge into the choppier waters of equities. However, although further rate cuts seem likely over the next month or two, good news is starting to filter through from
the markets. Asset Management Strategies & Rate Cutting Yes, the rate cutting continues unabatedly in the world’s biggest economies (except Japan where it is already at zero), but there are signs that equity markets have levelled off and are, indeed, reviving. If this is sustained, then the rate cutting could well be nearing an end.
Judging by the views and actions of some (not all) of our panel of asset managers, bad news from the markets is causing less and less downward pressure on share prices. The most notable overall change this month to last was that within their dollar portfolios models, our asset managers have added more than 5 per cent to their dollar equities weightings. Ashburton, Baring, Capel Cure Sharp, Forsyth, Investec and Rothschild all upped their US equities exposures. None cut back, so perhaps the world’s economic engine has started to fire on all cylinders once again. Asset Management Strategies Regarding Earnings “Much of the [depressed] earnings outlook has already been factored into share price: technology stocks in particular have watered down expectations so far during the first quarter that they are now finding it possible to meet forecasts,” says Capel Cure Sharp. Likewise, Forsyth investment director Rossen Djounov believes that average news that would once have depressed equity prices is now starting to lift them (everything is relative). “Technology stocks actually sparked a global rally,” says Djounov. “Initially, this upswing began when Dell released quarter one results that met its already heavily revised earnings forecast. Although this was hardly exceptional news, it provided a springboard for buyers to return to the market.” Another case in point was Cisco, the company that provides most of the infrastructural technology for the internet. The company’s awful first quarter results did dent the Nasdaq significantly. It went down by around two per cent in the ensuing sell-off. Asset Management Strategies & Cisco But suppose Cisco had announced such bad news a year ago: a $2.69 billion net loss in one quarter, a sales decline, a telecommunications spending slump. If that had happened, a fall in the Nasdaq of at least 15 per cent would have been more likely. Ten days after the Cisco news, we saw the real fundamental, the Federal Reserve’s rate cute. It revitalised the market. The Nasdaq jumped three per cent and was looking buoyant as we went to press.
Such has been the interest rate reductions’ impact that the Nasdaq actually put on 31 per cent in April. And it held reasonably strongly after Cisco’s (anticipated) woes were confirmed. Asset Magangement Strategies - The Major Stock Markets As we went to press, the major European and US stock markets also appeared in fairly robust shape. An end to the rate cuts and - hopefully for cash investors - increases in the not-too-distant future is now possible. At Collins Stewart in Guernsey, the mood is upbeat about equities. Jim Goodey, director and chief investment officer, says: “We anticipate that a limited period of price consolidation and a modest bout of profit taking is likely. But looking further ahead, the outlook for equities is improving. The Federal Reserve Board has embarked upon a programme of dramatic interest rate cuts. Asset Management Strategies - Interest Rates “Indeed, they recently cut interest rates, between policy meetings, at a time when the equity markets were already rallying. Equally important, Congress is set to sanction $1.3 trillion of tax cuts which should ensure that consumer spending and sentiment remain healthy. “The remaining Western World Central Banks have followed the Fed’s example. The Bank of England has reduced rates three times; the European Central Bank just once [at the time of writing]. The Bank of Japan has already sanctioned a zero-interest rate policy.” “As the year unfolds, we expect the outlook for equities to keep improving. The valuation overhang has been eliminated and the markets can now be judged as slightly undervalued. Stabilisation in the US equity market means that global contagion risks are unwinding.” Asset Management Strategies & The US Federal Reserve But the US Federal Reserve is taking a big gamble, according to some asset managers. High inflation could be lurking in the shadows says Ashburton Asset Management’s investment manager Frances Wilson. And if that happens, investors can kiss goodbye to any gains they make from better cash rates. Ashburton’s Wilson says: “The massive interest rate cuts in the US means we now have the lowest rates since 1994 and very low levels of real interest rates, given the rate of inflation. But we believe inflation is going to force the Fed to raise rates by the fourth quarter.” Asset Management Strategies - Ashburton Ashburton believes the low interest rates will boost equity markets’ performances for around three months or so, with the opposite effect on bonds. Capel Cure Sharp agrees that the Fed’s stance engenders an inflation risk. The asset manager says: “It appears that these markets have taken the view that the latest move by the Fed indicates that it will risk inflation in order to reflate the economy, a move that ought to be reflected around the world. “In the near term, we would expect all the major markets to consolidate their gains. Cuts in interest rates have, however, helped confidence, and more can be expected, at least in the UK.” Asset Management Strategies & Banks OF Bermuda Bank of Bermuda says the US market’s position is still too unclear to take an overweight position. In its monthly report, the bank says: “We believe it is still too early to recommend an overweight US equity position, and prefer to be indexed with the view of building an overweight position when the investment horizon becomes clearer.” If there is one area that our asset managers have agreed upon it is that the election of Junichiro Koizumi as leader of the ruling Liberal Democrat Party is a positive step for that country. Although Japan has appalling levels of debt, a shaky banking regime, and a credit rating that has suffered two recent downgrades, Ashburton has seen an upside there for some while. This month the asset manager again increased its Japan weightings by 1.1 per cent in both its dollar and sterling allocation models. Similarly, Djounov of Forsyth also sees room for optimism. Asset Management Strategies Regarding An Economic Recovery “Hopes for an economic recovery in Japan were improved as the new regime is expected to encourage foreign investment.” Stimulative policy conditions will feed through to earnings and will benefit profits at the turn of the year. The technical position in the equity markets improves daily. 
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