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Year of the stockpicker

The passing of 2001 has not been mourned by many in the investment world after global economies lumbered towards recession and markets crashed to a four-year low in September.

After the second successive down-year, fund managers are crossing their fingers for 2002.

There is plenty of optimism. Standard Life Investments believes equity markets will outperform bonds this year and is hopeful that investors will regain their appetite.

Morley Fund Management expects the UK to recover strongly in the second quarter and predicts the FTSE 100 will hit 6,000 by the year-end.

While the UK market is most widely tipped as having the strongest growth potential, some IFAs think that Europe and the emerging markets are set to benefit most from economic recovery around the world. But few fund managers believe the road to recovery will be an easy ride for all and there are suggestions that stockmarket indices will still run into difficulties.

Invesco Perpetual chief investment officer Bob Yerbury says: “The UK is forecast to be the best-performing economy in G7. Growth projections have seen modest upward prediction, there are no undue problems with inflation and corporate sector results are adequate. It is essential to be highly selective in picking individual stocks and the value will not be in indices.”

There is a general consensus that this year will be a stockpicker&#39s market. Yerbury says: “Most of us are glad that 2001 is over. We are looking at a subdued recovery in the next year but the opportunities are not in the indices but in individual stocks. We suspect the recovery will be a muted or staccato affair.”

Jupiter chief investment officer Edward Bonham Carter says: “2002 will be a stockpicker&#39s market and we will be looking for companies that have predictable business models combined with low borrowings and strong cashflows. These are likely to be in the mid-cap or small-cap sectors and may be cyclical companies such as housebuilders.”

Hargreaves Lansdown head of research Mark Dampier says: “This will be a stockpicking year as the blue chips are fully valued and dominate the market. I would be looking at mid-cap and small-cap sectors, with only the very experienced managers making the money.”

Bates Investment senior investment adviser Paul Ilott says: “There is such a wide divergence of opinion on what the indices will do that stockpicking is going to be absolutely key to success. It will be a difficult trading year for many companies and only a handful will produce really good results. The best stockpickers will be able to weed out the bad performers.”

Most fund managers expect interest rates to remain low, which will help bolster equity markets.

Jupiter says equities are good value and looking cheap compared with Government bonds. It expects returns on UK equities to be between 5 and 7 per cent, which it says will be enough to attract investors away from cash.

Jupiter says interest earned on cash will remain low and even cautious investors will need to look beyond Government bonds and deposit accounts to meet their income requirements.

Ilott says: “Interest rates will remain low, meaning that deposit-based investors have not got too much to be excited about. They may be more tempted to move away from deposit accounts into perhaps a bond fund to eke out a better return.”

Dampier says, with equity income funds returning only as much as cash, investing in a high-yielding bond will provide better dividends. “They may be unfashionable but the dividends on high-yield bonds will count for more. Some corporate bond funds are not giving any better returns than on deposit accounts,” he says.

The behaviour of the US market, as the determining factor for recovery, remains a shadow over the rest of the world. Scottish Widows Investment Partnership predicts there will be more profit warnings across a range of US industries, which will undermine investor confidence in the short term.

Axa Investment Managers head of UK equities Stuart Fowler says: “Although the UK scene is somewhat brighter than its global counterparts, thanks to a pick-up in Government expenditure and the ongoing strength of the consumer, the troubled US economy still has a substantial influence on the profits of UK companies.”

Fund managers are confident of a recovery by the year-end but few believe the road through 2002 will be golden.As uncertainty over the US continues and indices prove difficult to call, those with a keen eye for the right stocks look set to make the best returns.


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