The British film 'The Full Monty' is not what you expect to be talking about in a review of the investment strategy of one of the world's leading fund management houses.
But Jeffrey Davis, the Boston based chief investment strategist for State Street Global Advisors, part of the $400 billion State Street Bank group, is convinced that beyond crunching numbers understanding the cultural factors behind corporate performance is an important component of investment decision making.
The most interesting question for the British market for the long term is the signs of a new dynamism in the UK" he says, adding that this mood of upbeat "can do" optimism and flexibility is evident in the hugely successful movie and is one of the reasons for its success in the US.
In its non-index tracking funds, State Street, he says, tries to identify companies with a global franchise that have the capacity to outstrip their competitors, Coca Cola would be a good US example.
"Some of the leading UK companies in certain areas have a vast ability to be globally competitive" he says, singling out firms like Glaxo and Smithkline Beecham,Vodaphone, Unilever and ICI as businesses which may be displaying the potential to be in this group.
The political dynamics of the UK market are also en-couraging in his judgement. The election of the Labour Government did cause "a quiver or two" says Davis, but now as an investor he feels comfortable with the pragmatic, Clintonesque ap-proach that has become evident.
This optimistic assessment of the UK market coincides with a more guarded long term judgement on the Continental European markets which influences decisions about how the flow of funds is weighted. In terms of restructuring and increasing their flexibility and willingness to take bold decisions "Many of the leading Continental companies have a longer way to go" he says adding that the UK and the Netherlands are the most progressive and forward thinking economies.
Marc Slendebroek, head of European fund management for Zurich Investment Management, is also cautious about the European markets relative to the UK. "Everything in Europe looks slightly extended relative to long bond yields and not particularly attractive" he says. The surge in European markets reflects in part the impact of European financial convergence ahead of the launch of the Euro. This has driven bond yields down to around 5% and lowered the cost of capital and risk perceptions at a time when economic growth is picking up and the inflation risk limited.
In the UK by comparison "relative to bond yields equities look cheap" he says. "If one assumes that the UK will enter EMU as part of a second wave bond yields will come down, short rates will fall."
It is of course the 'if' which is one of the problems. It is not so much the strength of the British pound but the danger that after overshooting on the upside it will proceed to overshoot on the downside too which has to be taken into account. The danger is of a degree of volatility which will make it difficult, both practically and in terms of the requirements of the Maastricht treaty, to find a politically opportune time for Labour to launch an entry bid.
Slendebroek also favours some of the big UK multinationals, Shell and BP, for example, because of what they are achieving in restructuring not as oil price plays, Glaxo because it is amongst the best quality global pharmaceutical companies, business service firms like Rentokil and UK banks which he says are cheap relative to many of their competitors.
But he shares the unease about the way valuations in so many of the world's equity markets have been surging. "When markets go up 50% in a short period you are bound to get nervous" he says citing the flow of global liquidity into the asset markets.
It is a theme echoed by Joe Hall the head of marketing for European equities at Deutsche Morgan Grenfell. He says that there is no shortage of people in the markets who feel they are seeing excesses reminiscent of the bull surge in 1986 and 1987.
"But it is not so obvious what is going to stop it this time" he says. The economic underpinnings to the market are " very benign" and there is no sign yet of the rise in interest rates which usually spells trouble.
"The panic is amongst fund managers who are trying to outperform their competitors. Their job is relative performance and if they have been say underweight in the financial sector they are having to run very hard to make up this shortfall" he says
Hall also sees the UK as one of the EMU convergence plays left. With UK Government bond yields at 6% against 5% in Euroland, optimism about UK entry to EMU would give the market a solid underpinning.
The flexibility of the British economy, the fact that, for example, it is much easier in the UK to make acquisitions and the way that UK companies are moving to re-engineer their balance sheets and increase gearing in a low inflation/low interest rate world, is another positive he sees for the UK market.
While viewing the medium term outlook for the UK market positively the sense that, outside Asia, equity markets in general are being driven too high by global liquidity flows, is near the surface and investment managers are on their guard in case something unexpected spooks the herd. They know that a correction in major market, particularly the US market, would quickly transmit itself around the globe. They have seen how managers who went liquid too early have been caught out and have no desire to suffer the same indignity. Stewart Fleming"
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