Geoff Cutmore - Morning Thoughts

Beating the Index Without Loading Up on Equities

Did you do better than 14.8% last year? I ask because that is what Bob Mckee at Independent Strategy claims for the clients that followed his advice in 2006. The brave part of the advice was to underweight equities.

Outperformance was achieved by taking 3 major decisions:

1. Heavy overweight in gold and 'soft' commodities.

2. Underweight equities - within that overweight Europe over the U.S.

3. Long the Euro versus the dollar.

Bob and his team beat the index, but didn't have to pick a stock to do it - as an economist he was more interested in the macro story and his return was achieved on major directional calls. So, what about 2007?

Bob says they are sticking to the same main calls, with the addition of Japanese equities and the yen to 'catch-up' in 2007 and outperform. Of course Japan was a terrible laggard last year, and it has made it onto a lot of buy lists this year because people believe it must turn around. Bob stresses the opportunity is in the domestic economy, the stronger yen he envisages will not be a great support for the exporters.

Bob is sceptical about the ability of the 'great liquidity boom' to stay inflated. "Credit bubbles can collapse of their own accord and don't always need a hike in interest rates. But we also think the Fed may yet have to hike in 2007, not cut as the markets expect."

The jury is still out at this stage on the strength of corporate earnings, and that may challenge his call on equities if we get delivery of double-digit numbers through this quarter and next. But this is an outlook for the full year - and Bob cannot see sequential quarterly earnings growth in the crystal ball at this stage.

Unusually, we had a CEO on from a train operating company in the U.K. this morning. Moir Lockhead is the head of transport company; First Group. They were announcing investment in new equipment. The company's share price is up 40% over the last year. The U.K. has the highest train fares in Europe and the rail network also continues to be directly subsidised by the government.

That means more public money to make the trains run. For commuters the new years present was a 4% plus rise in season ticket prices.

As a shareholder that sounds like a good deal, as a consumer it feels a bit rough. Britain may have full employment - but its no wonder the middle-classes complain their disposable income is under pressure.