A well-known US baseball player once said it's difficult to predict most things, especially the futu...
A well-known US baseball player once said it's difficult to predict most things, especially the future. While wearing an odd uniform and smacking a ball out of park may have a tenuous link with the stock market, it's an apt quote for a week when Nasdaq fell by 8% and the Footsie fell below 5600 for the first time in years.
If the stock market does, as is often reported, anticipate events 18 months ahead of actuality, the picture ahead for investors is murky to say the least. Comparisons with 1987 and 1929 are already being drawn and suggestions that, like Japan in 1990, a stock market crash after an investment boom heralds recession.
There are enough pundits to reinforce that view. The US is slumping, Japan is shot and Germany tottering runs the commentary.
From a UK perspective it is hard to see things in such a gloomy light. Earnings estimates are still positive. Last week unemployment dipped below the 1 million mark for the first time since 1975. Inflation remains benign, giving the Bank of England plenty of scope to cut interest rates, and even retailers are beginning to report more interest from the consumer.
In the US even, some are suggesting the picture is not as bad as portrayed.
Bob Yerbury, chief investment officer with Invesco Perpetual, says the fall in market indices since Nasdaq's minor crash last April has spurred the US Federal Reserve bank to begin pumping money into the economy again in the hope of reinflating the nation's consumer marketplace and stoc markets, and averting recession.
"There's a real concern that the US is close to zero growth," Yerbury says, adding that nearly 40 interest rate reductions have occurred worldwide this year to stabilise the global economic web.
The tech stock frenzy that drove much of the economic growth in the US in 1999 has collapsed, Yerbury says, and along with it confidence in tech stock ratings around much of the world.
Patrick Minford, professor of economics at the Cardiff Business School, notes that the Fed has intentionally reined in the frenetic growth of the US stock market and economy but the slowdown has "certainly been slower than it planned".
Minford told asset managers BWD Rensburg that the swift action by the central bank in cutting interest rates and its stating it would cut them further this year if need be would likely "turn growth upwards in the second half of the year".
The Federal Reserve, Minford contends, is easing interest rates to reflect what a free interest rate would do with a stable growth in money supply.
The Fed had injected money into the local and national economy twice in the recent past, Yerbury says. Once in 1997 and 1998 to avert the economic collapse in southeast Asia and then Russia's economic woes spreading further, and then in late 1999 to make sure plenty of money was in the US economy if crises arose from the millennium bug.
The supply of capital in the US was also high in the early 1990s when emerging markets boomed, and when the US dollar was weak around 1987.
Federal Reserve chairman Alan Greenspan is seen in many circles as fundamentally different to other central bank heads. He matches his economic announcements and actions largely to the state of US stock markets, chiefly the New York Stock Exchange and Nasdaq, while European central bankers will move in tune to Continental political changes.
And economics, it could be argued, move more in tune with stock markets than with politicians.
Closer to home, BWD Rensburg predicts a return to lower returns from equities. Yerbury says business confidence in the UK is "rather stronger than it is in the US", and consumer confidence in the UK has headed north since the second quarter of 2000, while that of US consumers has been dropping since the same point.
The asset managers state: "If interest rates remain steady, then advances in the equity market become much more dependent on earnings growth.
"We believe that there are a number of implications for investors going forward.
"If we make a number of basic assumptions regarding the level of inflation, real GDP growth and the overall market yield, we can estimate future annual returns, or initial yield plus real growth in GDP plus annual inflation.
"Given that the Bank of England has a target for inflation of 2.5% it seems fair to use this figure. Yield on the market is 2.41%. If we assume long-term GDP growth of 2.75% we arrive at an expected annual return of approximately 7.66%."
Given these future returns, BWD Rensburg says stock-picking is now the best investment tactic, and "it will be the companies with real growth potential that will come to the fore".
Over the next two pages we have constructed a portfolio of 10 stocks that we think offer investors the best of both worlds at present.
For those worried about the spread of the US problems across the Atlantic, they offer strong defensive characteristics.
Most have strong market positions, generate decent earnings and pay dividends. Imperial Tobacco, Severn Trent, Foreign and Colonial IT and Vosper Thornycroft are all solid businesses.
There is also enough earnings potential if the US markets do recover to justify the 10 on grounds of growth as well. Stanley Leisure, Kier, Safeway, BTG, and Primary Health all should churn out decent growth in the next few years irrespective of the economic background.
Wild card is HIT Entertainment which we have put in for the combination of decent intellectual property assets in Barney the Dinosaur and Bob the Builder. We think IP will prove a resilient business, hence the choice of BTG as well.
We also surveyed some of the UK's top fund managers and most expect the FTSE 100 will close the year higher than its current level of around 5600.
The most bullish of the fund managers is Jon Thornton, head of UK equities at Aberdeen Asset Management, who expects that market will close at 7250, provided the UK does not slip into recession. Richard Buxton, UK Growth fund manager at Baring Asset Management, and David Rough, group director of investments at Legal & General, are also bullish, expecting the market will close at 7200.
Their expectations work out to mean that the FTSE 100 will reach a level that exceeds its highest peak yet of 6925, achieved in December 1999.
But at the other end of the scale, Justin Seager, UK fund manager at Jupiter, is most bearish, because of concerns about the US economy and the impact that will have on earnings growth in the UK.
The fund manager estimates follow recent rocky markets whereby the FTSE 100 looked on course for the largest one-day drop since the crash of 1987, by tumbling more than 4%. London shares are now at 20% below their end of 1999 peak.
Of the 13 fund managers surveyed, the level tipped most frequently is 6300, which is expected likely by David Gasparo of Schroders, Mark Tyndall of Artemis and Richard Urwin of Gartmore. The number in bold is the manager's prediction of Footsie's level at the end of the year.