Money News
The first three months of 2008 saw the worst quarterly return for UK equities for almost six years. Intra-day lows were reached on January 21st, when the significant nervousness in financial markets prompted an emergency cut in rates by the Fed. And much of the quarter was spooked by credit markets, which priced in default rates double those of peaks in previous recessions.
Towards the end of the quarter, the market swung wildly on the near collapse of Bear Sterns, and the ensuing rescue offer. The Fed's action since then has signalled its intention to prevent failure of a major institution and helped steady the credit markets, says Rebecca Chesworth, UK Equity Investment Specialist at investment house, Threadneedle.
The FTSE 250 index has continued the out-performance seen since mid-January. In sector terms, the biggest falls have been in consumer services (retail and leisure) and telecommunications. Mining, oil services and industrials and real estate have held up relatively well.
Chesworth adds that earnings forecasts have been surprisingly resilient, and company management are still upbeat (albeit admitting that visibility is short). Results announced in Q1 showed some deterioration, but there were still more companies beating than missing forecasts. Despite the large earnings downgrades to banks, estimates have not fallen in aggregate because of the strong demand for commodities which continues to boost mining profits.
The $64,000 question though is whether the UK stockmarket is over the worst.
Chesworth says that Threadneedle has yet to identify the turning point, but is certainly looking for it. Threadneedle remains positive over the longer term, seeing support from attractive valuations, particularly dividend yields, and the financial health of UK plc. And it expects to see the return of M&A action, as well as activity from the Sovereign Wealth Funds. Meanwhile, sustainability of growth in Asia and emerging markets offers a growing source of revenue for some UK companies.
In the meantime, the nervousness over the last few weeks shows that the sub-prime saga is far from over. Threadneedle says we can expect to see rumours on the health of investment banks and hedge funds to continue, as well as corporate defaults rising.
The market's focus will continue to be on leverage in all its guises, with banks, companies and consumers all facing much higher financing costs and tighter credit despite the cuts in central bank rates.
Threadneedle is currently overweight, food retail, tobacco, utilities and defence. Meanwhile, the large underweight positions; beverages and food producers, are in expensive, defensive sectors which are suffering challenges to their profitability, or are in areas reliant on the UK consumer, such as general retail and banks.
In the financials sector, the UK equity team favours those banks with secure balance sheets and long-term growth prospects, such as Standard Chartered and HSBC. At present it's staying clear of banks that could end up having funding problems or need equity issuance, such as HBOS and RBS.
11 April 2008 © Moneyextra.com
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