GLOBAL - Ned Riley, State Street Global Advisors' (SSgA) chief investment strategist - global active equity, has claimed that equity markets are on the rise again, with technology stocks taking a lead role on the recovery.
According to Riley, a number of factors will “surprise investors” on the upside. He asserts that equity markets already rebounded from the lows of last year. As evidence, he points out that the Nasdaq and Dow Jones indices rose by 40% and 20% respectively since September 21, a result of the market looking forward to better times.
Riley also believes that valuations, analysts and management have been so traumatised by the rapid deterioration in fundamentals and profits that future guidance focused on this year’s earnings is “severely tainted”. This, combined with fund managers lowering their long term growth expectations, has left stock prices reflecting much more reasonable assumptions.
The dramatic lowering of expectations is what Riley believes will help the technology sector to continue its comeback and lead the markets higher. He also claims that the upside surprises could be much higher than expected as the reduction in valuations and expectations may have been “too aggressive”.
This view contrasts with SSgA’s chief investment officer, Alan Brown. Whilst Brown claims that the world economy will recover he says equities markets will continue to flounder due to a variety of factors. In particular, Brown highlights company earnings, which he believes will be lower than expected figures, as the reason for future flat markets.
Additionally, Riley predicts that the fallout from the Enron debacle will add to the market recovery. Due to the outbreak of what he calls “Enronitis”, every company is under suspicion relative to joint ventures, loss accruals, derivative exposure, related party disclosure, securitization, credit risk, operating risk and, ultimately, stock market risk.
Enronitis has led to a clear drive for better accounting and governance procedures, Riley claims. Words such as lucidity, transparency, clarity, and soundness will describe the financial statements of the future. Eventually, this “penance process” will result in a restoration of consumer confidence, confidence in corporate management and higher valuations.
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