International Investment Outlook
Last year, which began with the rise of TMTs (and technology stocks
in particular), seemed destined to end in down-beat despair. As
new media mania hit the high street, cash flooded into technology
stocks at an alarming rate. The resultant distortion in value has
undergone a process of correction ever since. Confidence briefly
re-emerged in September, only to be dashed as disillusionment once
more returned. And the steady downward trend begun in March has
seemed set to continue its higgledy-piggledy course into the New
Year, though at markedly lower rate than throughout 2000.
This is certainly the view of Morgan Stanley Dean Witter, which
said in December that European stocks would continue to fall 15
per cent before bouncing back later on in the New Year and that,
for the time being, bonds represented a far better reward for the
risk. And as if to prove it, the debut of Norwegian telecoms giant
Telenor ended first day’s trading at a discount of 4.8 per
cent.
The biggest uncertainties in recent months, though, have centred
on the US. Firstly there has been the US presidency debacle, with
investors glad to finally see an end to the uncertainty that has
existed since September. As the Supreme Court stuck its oar in and
handed the presidency to George “Dubya” Bush, the markets
finally knew which way to jump.
International Investment Outlook & Bush And Gore
Both Bush and Gore had promised tax cuts but, despite the obvious
allusion to Bush senior and his “read my lips, no more taxes”,
it is widely accepted that the Bush presidency is a more favourable
outcome for the equity market than that of vice-president Al Gore,
due to Bush’s more business-friendly policies. The possibility
that unsustainable US economic growth would turn to recession has
been the other major issue worrying international investors. Recent
indications, however, seem to suggest that the much hoped for ‘soft
landing’ for the US economy might just be achievable. Investors
the world over will be hoping that these signals will continue and
that the New Year will witness the return of stability and investor
confidence.
Europe benefitted from the 3.1 per cent rise in Germany’s
manufacturing orders month on month, as the euro continued to rise
against the dollar. Analysts remain divided on the strength of the
currency with some claiming that the risk of a rise in interest
rates that would threaten European growth remained. However, Richard
Unwin, head of strategy at Gartmore, says: “It’s much
less likely that interest rates will rise and as a consequence the
profitability for exporting US companies will be enhanced.”
International Investment Outlook - High Oil Prices
High oil prices, which threatened consumer confidence and led to worries
among retailers, appear to have abated.
Early December, however, saw prices fall to their lowest level since
August. At the same time, and as if to prove that things were
at last looking up, encouraging remarks were heard from Federal
Reserve chairman Alan Greenspan in his address to New York bankers,
in which he said the slowdown of growth and weakness of financial
markets had raised the risk of a sharper downturn. The markets immediately
responded to the suggestion that interest rates might be cut and
the FTSE 100 reached a five-month high, up 2.3 per cent and the
less mature techMARK 100 was equally impressive, up 5.5 per cent.
Initial euphoria, however, faded as his words were interpreted as
bearish for earnings.
International Investment Outlook & Asia
Asia was encouraged by the Nasdaq rally and immediately responded
with one of its own as the Nikkei was seen trading above the psychologically-significant
15,000 mark, ending the day at 14,889.37. Commentators, however, labeled
it a ‘knee-jerk’ reaction and pointed out that the general
feeling was one of pessimism to the economic fundamentals. Institutional
investment into South East Asia in particular remains small largely
driven by US Nasdaq sentiment. Tom Copland, UK equity fund manager
and part of the global strategy team at Scottish Equitable, agrees:
“There will be more risk to the Asian economies next year as
there will be a slowdown in technology spending,” he says.
The Russian market is similarly reactive. The recent crises in
Turkey triggered a correlative dive in Moscow shares, only for them
to shoot back up with the announcement that the IMF would provide
an emergency loan to support the ailing market.
Suresh Sadasivan, emerging markets analyst at Old Mutual Asset
Management, explains: “The problem with Russia is that it’s
very high risk. Russian fundamentals are very strong right now,
but it is at the mercy of the rest of the world - hence the reaction
to the situation in Turkey. You also see it when the Nasdaq is sold
off sharply.”
International Investment Outlook And Unwin
Unwin interprets all these developments as signs for a “cautious
and realistic optimism”. He points to three reasons for increased
optimism: “In some respects the world has got more confident.
The identity of the US president has finally been decided. This has
not been a massive issue for the markets but has been something unpleasant
hanging over us. Point two is the announcement by Al Greenspan, which
should be seen as positive in the long-term. And point three is the
drop in oil prices, down below US$27 for the first time since August
against a high of US$37.” But Unwin is eager to qualify
this short term optimism with reference to the big picture: “What
has not changed in the last month is the global position and that
of the US,” he says. Unwin points out that both global and
US growth are still coming off, and that there is considerable concern
over whether it is a long-term downturn in growth, and what the
consequences will be for both consumers and company earnings alike.
International Investment Outlook & Equity Prices
However, overall the outlook for January and the rest of the year
is good. He predicts that equity prices will drop further, but denies
that this will be a trend that will continue. “We think we are
closer to the end than to the beginning (of the downward trend in
markets) but we can’t be sure where the bottom will be. You
can’t predict the bottom and those that try will end up missing
out. Investors should be looking to pick up stocks gradually in the
next twelve months (and) this is a good time to pick up equities in
most markets.” Copland agrees that the key issues at
the moment are what is happening in the US. He points to the evidence
that the US economy is slowing and predicts that we will see corporates
slow down their capital spending. “The key issue is the change
in behaviour of the US consumer. Our view is that he will continue
spending,” says Copland although he is uncertain of this.
International Investment Outlook And US Consumers
“If the US consumer gets worried about the continued downward
trend in equity markets, he may well decide to cut his losses and
start saving. If that happens then we are in for a choppy ride. A
lowering in interest rates would stabilise the situation to an extent.”
Lawrie Chandler of Old Mutual International agrees that the rate
of growth in the US is finely balanced: “Any slowdown in growth
beyond that which is sufficient may cause corporate earnings growth
to fall, which may in turn spark an equity slump,” he says.
“However, all indications are that the economy is decelerating
in line with expectations and the FOMC is closely monitoring the
economy ready to ease monetary policy if necessary.”
Investors in tech shares will be hoping that the current rally
continues. Early December saw the techMARK 100 index fall to levels
not seen since November 1999, when the market was established. The
rise that greeted the Greenspan statement could be sustained when
the US president saga moves into distant memory.
International Investment Outlook - Chandler
Chandler sees technology stocks remaining a key investment for growth-oriented
funds, but sees a change in the sort of funds attracting investment.
“Technology investments now appear to be shifting from providers
of technology to users of technology and with many blue chips now
implementing their e-strategies, the big guns are now moving online
more aggressively. It’s likely that into 2001 this trend will
turn around as large-cap stocks invest heavily to web-enable themselves,”
he says. The hope is that the Christmas break will bring with
it a renewed hope and that the despair that has followed the latter
half of 2000 will give way as the encouraging signs for the world
economy are backed by a concerted rally.
Chandler says: “The coming year certainly warrants enthusiasm
because 2000 has been finding it difficult to find momentum following
selective shocks. The time of aimless markets should soon end and
the signs are that in 2001 the new economy will help markets return
to their path of creating value.”
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