A respected global fund manager has warned investors that stocks will likely be in a trading range and index-based strategies will be a risky proposition over the next few years.
The S&P 500 Index will retest its March lows as analysts' earnings expectations are re-reset downward. The expectations for 2010 are simply too high at US$72.73, 41 per cent above the first quarter 2009 run-rate, Bennelong SGI senior portfolio manager John Boich said.
Earnings expectations are unrealistic as companies cannot cut costs fast enough to match profit estimates, while US consumer demand is weak due to an increase in the savings rate, a repair of the household balance sheet and unprecedented wealth destruction.
"I'm convinced that using the S&P 500 as a proxy for global shares, we will be retesting the lows plus or minus 20 per cent and be stuck in a trading range of 666 to 950 points," Boich said.
He said in a volatile, range trading environment investors need to have fund managers who are stock pickers with a proven track record of generating consistent excess returns in a variety of scenarios.
Research house van Eyk also expects a range trading environment for the near to medium term, which will benefit active managers that are able to identify and take advantage of varying opportunities at both a stock and sector level, van Eyk investment analyst Michael Lindsay said in May.
Boich said in order to be successful in these markets stock pickers need to return to balance sheet fundamentals and carefully review earnings forecasts in light of falling American consumer demand.
Bennelong SGI's research of these factors has uncovered opportunities in software/gaming stocks and emerging economies such as India and Brazil.
