The mood in the City is subdued and the atmosphere is relatively sombre but the current situation represents a significant improvement compared with this time last year. While investors no longer have to watch global stock markets sink lower each day, thunder clouds still loom overhead; will the heavens open and unleash another down pour, as some believe, or will the economic winds blow the storm clouds away?
Improving economic and company news is starting to filter through but, having been dealt such a hard blow last year, investors are uncertain as to how the data should be interpreted and whether the news flow can be trusted. In our view, the most positive signs include the increase in shipping levels, an improvement in manufacturing indices, the strong performance of the commodities index year to date and the fact that the best performing stocks are less defensive. These ’leading indicators’ imply an improvement in global economic conditions and stock markets have reacted positively, recovering from the lows reached in the first quarter. The big question is: have stock markets now bottomed?
The benefits of the UK fiscal stimulus package are starting to feed through and take effect further down the chain. Lower interest rates combined with falling utility prices are leaving consumers with more cash in their pockets. The savings rate is increasing and we are also seeing evidence of a pick up in consumer spending.
We believe it is the right time to start reinvesting cash into the market but with a cautious and considered approach. We have a preference for companies whose primary business comes from overseas markets as we remain concerned about the UK economy. We are looking at early cycle sectors with leveraged exposure to the economy which would benefit from a pick up in demand and companies with attractive dividend yields. Strong balance sheets are also an important consideration while liquidity remains tight. If we are right to believe that the worst is over, and in order to participate in what we believe will be a rising stock market, defensive stocks need to be replaced by growth stocks.
The US economy is in better shape than the UK economy and the US stock market reflects this. Other overseas markets, particularly among the emerging economies, also offer attractive investment propositions. We believe that the rationale for investing in the emerging markets remains strong. The growth of the middle class, eager to improve their standard of living and exhibit their new wealth, is a key driver of many emerging market economies. In addition, countries such as China, India and Brazil have large current account surpluses which, indirectly, will continue to fund an improvement in lifestyle for large swathes of their populations.
It is difficult to escape the negativity in the media and all too easy to believe that we are still engulfed in a worsening crisis. Signs of improvement - in economic indicators, company news and sentiment - are subtle and can be easily overlooked. But, while 2009 is not going to be an exciting year, it is important to recognise the changes taking place and position portfolios to benefit from an improvement in markets.
