Money News
Financial markets have seen significant volatility in recent weeks, driven by concerns over sub-prime mortgages in the U.S. and high yield debt in general. This could have an impact on economic activity, primarily through the housing market, if lenders become unwilling or unable to lend to lower rated buyers. More expensive debt for higher risk vehicles will also act as some sort of brake on the earnings of financial organisations.
But Alex Lyle, fund manager at Threadneedle Investments, notes that his firm's economic model for the U.S. had always anticipated a slowdown in housing activity, and doesn't regard recent events as being materially worse than had been expected.
"U.S. growth is no longer the driving force for the global economy, with rapid growth in China and many emerging economies, supported by a healthy recovery in Japan and core Europe.
"We therefore expect to see reasonable global growth combined with relatively low inflation over the next 12 months," Lyle says.
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Lyle notes that Threadneedle's managed funds have been overweight in equities and continue to maintain this position - the belief being that valuations are attractive with the current global P.E. ratio at around the lowest levels of the last 15 years. The UK dividend yield is well above the average for the last 3 years, despite an extremely low payout ratio, which gives scope for good dividend increases.
He adds that while markets are worried about debt it should be noted that it is not the quoted companies that are showing high levels of borrowing. It is individuals, highly leveraged hedge funds and private equity vehicles holding substantial debt.
Furthermore, corporate profits growth is strong. Indeed, the Q2 reporting season around the world was encouraging with companies, on balance, beating expectations and leading to upgrades of forecasts.
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"We have recently noticed a sharp rise in director buying of their own shares, showing the confidence they have in their businesses," he adds.
"Our funds, in general, have a bias towards high quality companies that can show reasonable growth. We believe these companies will be well suited to the current environment and a world of slower corporate earnings growth.
"We also favour a number of the more cyclical areas such as mining and industrials driven by Chinese demand and a global need for capex and infrastructure. We are relatively cautious on Western banks and Western consumer plays.
"The current correction may have further to go and is likely to depend on the extent of forced selling that has to be done to satisfy redemptions and de-leveraging. However we believe equities represent good value and the market weakness will offer long-term investors a buying opportunity."
17 August 2007 © Moneyextra.com
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