Expect markets to rally into earnings season

Global markets moved lower this week as investors took profits in the technology and other sectors. A realisation of the long run of gains coupled with a slew of mixed economic data led the profit taking slump in equity prices. The biggest losers were the US NASDAQ, the German DAX and the Japanese NIKKEI, which dropped 6.3 percent, 7.6 percent and 6.0 percent respectively on the week. However, the US DOW index did stay above its recent trading floor of 9300. As we close September and move into third quarter earnings reports, all eyes will shift temporarily away from the economic statistics and focus towards corporate earnings reports. We expect most companies to meet or exceed their guidance figures and thus substantiate the economic recovery most feel is happening.

We note that the US Commerce Department announced last Friday that healthy consumer spending nudged US economic growth ahead at a slightly faster second-quarter pace than previously thought, setting the stage for a second-half surge in growth. A recent JP Morgan Fleming study in the UK shows a definite problem in individual savings towards retirement. A problem I suspect is present here in TT as well. According to Fleming, 59 percent of working adults in Britain believe they will have a comfortable retirement but 43 percent of them aren’t contributing anything at all to a pension or savings programme. We have been encouraging individuals to revisit their investment programme with a view to getting beyond the past bear market and look towards the future.

Other figures emerge from the JPMF survey underline the extent of the problem. Fleming calculates that only one in four working adults in the UK can currently expect an income of 50 percent or more of their final salary in retirement. It also believes that 53 percent can now expect to have some difficulty making ends meet in retirement. The survey also shows that the average adult believes that he or she will have an annual retirement income near 77 percent of the national average salary. The survey heightens our awareness that saving just small amounts into a regular monthly programme can, build significant wealth over one’s working life, but it does require discipline. Such a savings programme, needs to be carefully planned though and should not be into a product which captures most of the growth for the investment firm. All investments should be measured on their net savings growth to you the investor and heavy commissions and low return policies need to be avoided.

Dollar cost averaging is a great way to build savings and personal wealth over time. This is a system offered by most mutual funds and insurance companies wherein you make a committed purchase each month for a set amount. The fact that more units or shares can be purchased at a lower price for the fixed amount offsets with more affect units or shares purchased at a higher price, skewing the average purchase price lower and improving the return on capital employed for the venture. Investing in this fashion also removes a lot of the confusion and pressure associated with making one single large block type investment.

In looking forward, we expect the markets to rally into the earnings season. Should the number of companies meeting or exceeding their guidance figures prove out as we suspect, new market valuations should be forthcoming with continued steady climbs in the various indexes. We still favour a bias towards the value investment selection process over growth prospects but continue to place emphasis on small to medium capitalisation issues where we believe the greater opportunity exists for earnings and market share improvements. Thus our recommendations focus on the Franklin Templeton Mutual funds which are stalwart performers in this regard and clearly demonstrated their conservative posture over the past 36 month down turn. Looking forward, we find it hard not to see the Health Care, Financial Services, Consumer Discretionary and Technology Sectors playing a significant role in our future lifestyles and thus remain over-weighted in these sectors.
e-mail: darcy@investments-intl.com