Geoff Cutmore - Morning Thoughts

'Boringly Good’ Year of Returns

‘The downbeat market sentiment continues to misrepresent a true, brighter economic picture...’, the words of Ken Fisher our guest host this morning.

Ken is a fully paid up member of the keep-it-simple school of market analysis. His message repeated several times this morning, that the low level of long term interest rates and the relative high return of equities measured by the earnings yield will deliver another ‘boringly good’ year of returns for equity markets.

There is a conspiracy of factors that will support markets: Global growth will be better than expected, equity valuations are attractive and the continued extraction of public equity through M&A (reducing supply) will drive prices forward. What of the worries about the US consumer? Rumours about the death of the US consumer ‘have been greatly exaggerated’ says Ken – US household net worth grew $1.4 trillion in the second quarter of 2006 to a record $53.3 trillion.

Is excess global liquidity distorting the behaviour of the yield curve suppressing long term rates (a key metric in his valuation model)? Silly people say silly things was his curt response....and he is not interested in structural inefficiencies like whether the Yen trades at the correct(?) levels, or whether China’s buying of US treasuries continues to distort lending rates in the US.

Ken is a class act; it will be interesting to see how his forecast unfolds through the year. One thing at least everyone will agree with, even the bears, is the point he wrapped up the show with this morning: the key to a winning investment is knowing something that others don’t; whether it is unique industry knowledge, or specific to a company. Otherwise, the implicit conclusion is invest with the index and leave timing in or out of the market for the major bear/bull switches.

Final thought – on the Autos sector, Harald Hendrikse, analyst at Credit Suisse singled out BMW as his preferred play in the European Autos. VW which will see management and restructuring announcements later this week is given a neutral rating.