Fund managers with a growth style are poised to make a comeback according to Alliance Capital senior vice-president Guru Baliga.
Speaking in Melbourne yesterday Baliga says while growth managers may find better times ahead future returns will depend on how the US comes out of the recession.
According to Baliga there are three types of curve being predicted for the US recovery – V, U or L. He says there is a 40 per cent chance of the recovery being either V or U shaped and 20 per cent chance of an L-shaped recovery.
“I don’t think we are now looking at a long recession (in the US), what we have seen is a trough. The question is how quickly and fast the upswing will be when it does happen,” Baliga says.
The pointers for recovery are also good but he says some of the negatives have to be put into perspective. One of these is the Enron crash, which is not as big as everybody is claiming. The company’s market capitalisation was $US70 billion, but Baliga says technology giant Cisco at it peak was $500 billion, today it is a fraction of that.
“Enron was an isolated incident, but there are a couple of things we do have to worry about. If consumers stop spending then we do have problems, as they have propped up the US economy,” he says.
Consumer spending is still growing at two per cent and that will work well with a V-shaped recovery, Baliga says. However a U-shaped recovery can also handle this level of consumer spending, but there will be problems with an L-shaped recovery.
“The odds are on growth investments paying, but that will only be achieved by doing two things. The first is going underweight in technology stocks as the telecom side is making it difficult to identify growth,” Baliga says.
There will be short-term rallies in tech stocks, Baliga says, driven by changing investor psychology, but these will fade as the fundamentals begin a sustainable recovery. At the same time the excessive manufacturing capacity in the sector will limit profit margins.
For the second investment strategy, Alliance is looking at financial services and healthcare.
“For growth we are looking at insurance companies as new policies after September 11 will boost earnings,” he says.
