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What’s bruin?

Market prospects Helen Pow assesses the split between the views of top fund manager Anthony Bolton who believes a bear is on the way and other managers who say the bull is still strong

Are we heading for another bear market?

Fidelity UK special situations fund manager Anthony Bolton voiced his concerns about a downturn at the Fidelity Investment Forum in London recently.

He said: “Now, although we have had the correction, I think markets have recovered very quickly and investors are still too prepared to take on risk. I believe another correction will come but I do not know when.”

But looking at the short to mid-term health of the market, most managers are bullish rather than bearish.

The price of oil has dived by 20 per cent over recent weeks and Gartmore head of multi-manager Bambos Hambi thinks the price of oil will continue to fall and other commodities have also gone down in price.

Hambi believes the economy could now be looking at “deflation rather than inflation.”

He thinks this is a strong sign that markets will stay buoyant as the May correction was largely due to fears over inflation.

Hambi says companies are continuing to to report impressive earnings, cashflow is excellent and many firms have rebuilt their balance sheets.

He says: “We believe that some investors have been waiting on the sidelines to reinvest their cash, taking the chance to get in to the market at a lower level.”

Schroders fund manager Andy Brough says merger and acquisition activity is boosting the stockmarket and comments: “Companies are being taken off the market faster than they can float.”

But some people think that Bolton is on the money.

F&C Asset Management director of retail funds Ted Scott says: “I think that there will be quite significant downgrades in the UK market – bigger than expected.”

He considers that another correction would be a reaction to the slowing US economy, where property prices are falling and interest rates are set to drop in early 2007. Elliot is bullish in the short term but believes that a prolonged slump in house prices will hit US confidence.

He says: “We expect US GDP to slow down to around 2 per cent next year.”

Hambi thinks that the key to whether another correction will ensue is how much the US economy slows and he considers a US recession is unlikely.

He says: “From our analysis, we believe the US economy is slowing but it will not dip into recession. Interest rates have gone up and the consumer and housing markets are slowing,” he says.

Brough says even if a slowing economy hits US confidence, it will not have a big effect on the UK market. He comments: “People worry about US consumers but I see more value in the UK, reflected in high corp- orate activity.”

Some IFAs believe that another rise in UK interest rates, reckoned to be in line for November, could spark off another correction.

Bestinvest head of communications Justin Modray says: “There are reasons to be pessimistic. If global inflation does continue to rise, we are likely to see banks raising interest rates, which could cause a global slowdown.

“If interest rates rise, people’s mortgages will go up and they will have less money to spend and less money to invest.”

Hargreaves Lansdown head of research Mark Dampier says: “The $64m question is, has the Bank of England finished rising interest rates? If interest rates go up, then we will probably see markets drop by 10 per cent. But it is a fine line, a bit of a tightrope and it could fall on either side of it.”

But Brough says: “If interest rates go up from 4.75 to 5 per cent or whatever, I do not think it is the end of the world. Our main worry is if inflation shows itself more than in current statistics.”

Scott believes the UK economy is likely to slow, irrespective of a rate rise, because of higher costs such as the price of gas and council tax and the level of personal debt while the savings ratio is low.

He says: “It will be difficult for the economy to grow as fast next year as it has this year.”

Bolton is regarded by most as the UK’s top fund manager and so his views on a downturn carry a lot of weight, plus, according o Modray, highly respected Invesco Perpetual fund manager Neil Woodford, is also bearish.

But Modray notes that there are other prominent fund managers who are feeling bullish, citing, in particular, New Star’s Patrick Evershed and James Ridgewell and Gartmore’s Ashley Willing as three examples.

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