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Investment Trends in 2005

Bob Michaelson

Sagitta Asset Management

27 April 2005

After the relatively festive end to 2004, January 2005 began in reflective mood. The impact of the rise in energy prices began to gnaw at investors’ forecasts, the US dollar was rising much against the predictions of many and a general wait and see mood prevailed. The mood lightened considerably in February, where the general feeling suggested that interest rates in the US may be coming towards their mid cycle peak, energy prices stabilised and many companies were suggesting a continuing upward order pattern for their goods. Early March confirmed the trend only to be subsumed quite dramatically by the gloomier trends that emerged in January. Energy prices hit new highs, some companies started to mutter about a slowdown in growth, and there were further dark rumblings in the insurance sector combined with a growing concern about corporate earnings for the first quarter of 2005. Consequently there seemed to be a great deal of activity with little to show for it by quarter end. The unease pervaded into the early part of April, as the first sets of earnings reports produced some disappointments. Interestingly, since then, earnings reports have produced more surprises on the upside with a considerable number of companies pointing to a positive outlook for the year. This typifies the mid-cycle recovery period. There are few substantive trends to latch onto, individual company performance is the key to enhanced returns. Meanwhile a great deal of corporate merger and acquisition activity reflects the fact that many corporations are cash rich and want to grow by acquisition, while others will be content to divest to concentrate on core business. Markets enjoy this interplay and beneath a possible muted market trend there will be significant positive activity in this area. Given that growth does continue, and we may be somewhat nearer the peaking in interest rates for this part of the cycle, then real estate continues to have an important place in portfolios. The shortage of quality office space and even residential housing in selected markets is surprising, but industrial activity worldwide puts demands on infrastructure support that will mean that real estate world wide is still in a positive demand mode. The first quarter of the year shows the efficacy of being in a broadly diversified strategy, and this underlying meandering trend of markets really does endorse the approach. There will continue to be a rocky road to recovery, but there is the potential to benefit from the positive dynamics.