Recent improvements in economic data suggest that the recessions in both the US and UK is much less acute than just a few months ago. Whilst the data is not back at levels consistent with economic expansion, if the current rate of improvement continues, the recessions in both the US and UK could end some time in the second half of this year, with a return to modest growth in 2010. Could Alistair have been right all along?
The sense that the global economy is through the worst has led to an improvement in investor confidence and an increased appetite for risk, which is apparent in the recent strong performance of perceived risk assets. In the mid cap area of the UK market, we have seen a valuation recovery in a number of cyclical and highly indebted stocks as the risk of a prolonged period of extremely difficult trading and/or the potential for financial distress has been greatly reduced, although not entirely removed; just the prospect of stabilisation for these companies has been enough to generate a significant re-rating.
With this backdrop, Fund managers have been repositioning to increase exposure to economically sensitive areas of the market, reducing exposure to what were considered to be ‘expensive’ defensive stocks and reinvesting the proceeds in a range of stocks whose valuations failed to reflect the stabilising outlook.
Despite rising rates of unemployment, those people still in work are generally better off as falling costs of food, fuel and mortgage repayments result in higher levels of disposable income - despite a rise in the savings rate, some of this surplus income is finding its way onto the high street.
A majority of fund managers are now positioning themselves to benefit from an economic recovery. Although the recovery may only be modest it’s a whole pile better than the Armageddon scenario that faced the markets less than 12 months ago.
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