Some comments from some of the few people that are worth listening to, even though 2 of them are plugging their funds. Pharma, media, tobacco, utilities, oil, telecoms, govt suppliers. Basically as pessimistic as equity fund managers can get as they can always find some excuse why people should invest/remain invested irrespective of the risk vs. reward offered.
"ANTHONY BOLTON: DRUGS AND MEDIA ARE THE PICKS IN BEAR MARKET
Anthony Bolton, Managing Director and Senior Portfolio Manager at Fidelity International
Anthony Bolton
Mr Bolton expects stock market conditions to worsen before new opportunities for investment emerge in 2008, perhaps as early as the first half of the year.
Financial outlook 2008
Having cut his teeth as an investment manager in the 1970s, Mr Bolton's current views on markets have been informed by his experience of the secondary banking crisis during that decade. "I remember that the effects can take some time to work their way through, but when they do, they act like a cancer - starting in one area and then slowly spreading to others. I would expect the contagion to seep into most stock markets."
In Mr Bolton's mind, the most important question is whether the "real world" will be affected by the turmoil in financial markets. He fears that the combination of tightening credit, increasing pressure on consumer expenditure and falling property prices will have an impact on the economy.
"While the first phase of the crisis for banks such as Northern Rock is about funding, the second could be about arrears."
A tough year but opportunities will arise
Banks will remain a difficult call for investors next year. Mr Bolton expects that some banks could be forced to raise more equity or cut their dividends. Interest rate cuts alone may not be enough, at least in the short term, to change this picture. However, out of this environment opportunities will arise.
"I expect to become more positive about markets next year as the consensus becomes more bearish. In the meantime investors should have a bias to larger well-financed, non-cyclical companies. Two sectors that I prefer are pharmaceuticals and media: they have been out of favour with the majority of investors and look cheap versus history."
Mr Bolton expressed his concern about the level of equity markets in the early summer, observing that the bull run was already more than four years old and that investors were failing to differentiate between high and low risk opportunities.
"I went on record earlier this year in saying that when banks were willing to lend money with no or very relaxed covenants, one needed to be wary. I didn't know at the time that would stop the bull market, but I believed that the risk/reward pay-off in the market was not favourable enough. We now know that the turning point was the banking crisis that started in sub-prime lending," he says.
In January 2008 Mr Bolton will step down from day-to-day fund management to take on a new full-time role at Fidelity International, mentoring the younger portfolio managers and investment analysts, supervising the investment process and looking at the application of company research techniques to the charitable sector. Management of both funds will pass to Sanjeev Shah."
Neil Woodford, Invesco Perpetual
Prior to the credit-market disruption, I was quite sanguine about the outlook for the UK economy (and indeed, the global economy) reflecting my more cautious perspective with respect to the consumption-led growth that was driving the US and UK economies.
Financial outlook 2008
Woodfood favours tobacco stocks for 2008
My view was that higher interest rates would, with a lag, restrain the willingness of consumers to continue to borrow to fund current consumption.
Furthermore, I was concerned that asset prices, especially house prices, had reached a level where there was the potential for a reasonably significant correction.
My feeling was that this would happen, in the normal course of events, by the latter half of 2007 and that 2008 would be a year of considerably slower economic growth in both the US and UK.
But then along came the credit issues associated with subprime- mortgage lending in the US. The consequent crisis in the financial system hit the UK in a very major way, best exemplified by the run on Northern Rock bank.
'Chance of a recession'
My current view on the UK economy going into 2008, in light of the credit-market crisis, is that the risks associated with the economic correction that I was already expecting have increased.
Put more tellingly, I believe that the chances that the UK and US economies will go into recession in the months ahead have risen.
My belief is that the US economy could contract in the fourth quarter of 2007 and that the UK economy could experience something resembling a recession at some stage in 2008.
The principal foundation of my belief in a possible recession is based on the fact that the borrowing costs of indebted consumers and businesses have risen as a result of higher market interest rates, which is a function of the liquidity constraints that are currently hitting the banking system.
'Reasons to be cautious'
Despite my cautious outlook for the UK economy in 2008, I do not wish to portray too gloomy a picture about the outlook for the UK equity asset class.
I am cognisant of the fact that there will be problems ahead for some companies in various sectors, particularly those that are operationally and financially geared, and are reliant on the consumer economy and indeed the UK housing market (which I believe is going to experience a long-overdue correction).
However, in my view, some of these problems have already started to be priced in to several stocks in these vulnerable sectors. That said, I believe it is too soon to clearly judge the extent of the correction and what impact it will have on the profitability of those companies that are facing difficulties.
'My strategy'
My funds are defensively positioned and I have sought to increase exposure to companies and sectors where I believe defensive characteristics are undervalued.
Therefore, I expect that even in a more difficult economic environment, there will be an opportunity to make positive, absolute and very good relative returns in 2008, although it is not going to be easy. In fact, a high single-digit return in 2008 will be a very good outcome, in my view.
I am confident that we will, over a three- to five-year period, achieve decent positive returns from this level, albeit that the environment is a lot more uncertain than it has been for some time.
'Opportunities still persist'
Away from the UK consumer, there are plenty of companies and sectors in the UK equity market that do not have a direct connection with the consumer and the economic correction that I am expecting to see in
2008. In fact, there are several companies displaying characteristics that would thrive in this environment, characteristics such as stable business models that are not cyclical, and predictability of cashflows, profits and dividends going forward.Since we have not had a recession (particularly a consumer-led recession) in the UK since the early 1990s, many of these defensive characteristics have been progressively devalued over a prolonged period of time.
I believe that we are now in an environment where some of these characteristics may well be re-valued, albeit that the outlook is clearly more difficult given the prevailing uncertainties surrounding the liquidity squeeze and credit crisis (and how that will be resolved), the consumer economy and the housing market.
However, despite this, there are companies and sector groups in the UK equity market which I believe have the potential for good absolute and relative performance in 2008.
'Favourite stocks'
By my estimates, pharmaceuticals stocks AstraZeneca and GlaxoSmithKline look attractive, as do utility stocks in general, where the fund retains significant exposure in a number of areas, including gas, water and electricity through holdings in British Energy, Drax, International Power, Scottish & Southern Energy and National Grid.
Elsewhere, tobacco features prominently in the funds. The funds exposure to this sector has been reduced in the last 12 months as a result of a number of takeovers and some investment activity, but broadly the funds retain a good exposure to the sector through BAT, Imperial Tobacco and Reynolds American.
I also see opportunities in telecoms, where I believe the sector has stocks with many defensive characteristics and good business models. The funds have large holdings in BT and Vodafone. Vodafone has performed very well in the last 12 months, while BT has not performed particularly well.
In my view, both companies look very cheap and attractive at this level. Meanwhile, there are plenty of other stock-specific defensive plays in my funds, such as Capita, and stocks in the oil sector with defensive traits, such as Royal Dutch Shell and BP."
It is time to stand back. There is too much churning around on the economic front at the moment, too much noise and not enough thought. The plight of Northern Rock is being bundled up with the problems of the global money markets; the threat of a UK housing crash with the dangers of a US recession; the performance of the UK economy with what is happening to the Government's own finances. The fact that the Government is on the ropes adds to the confusion, for it is being attacked on issues where opponents can score cheap points rather than for its longer-term errors of judgement....."