UK equity 2008 outlook by Stephen Whittaker, joint CIO and manager of the New Star UK Growth Fund
"I anticipate the equity market can make progress in 2008 and a closing figure of 6800 by year end would appear feasible. The wild swings in share prices in the latter half of 2007 indicate a market that is bedevilled by uncertainty. I believe that as audited company end-of-year results are released in the new year the market will gain confidence from the greater transparency and this should allow volatility to reduce as the year plays out.
I envisage interest rates being cut further as central bankers respond to the threat to growth. I believe the Bank of England will have reduced the base rate to as low as 5% by the middle of 2008. This should provide a spur to financials and take some of the strain off consumers.
Value is also visible in selective cyclicals although I am wary of giving much credence to decoupling as I believe if the US is headed for recession then we will all feel the repercussions.
I believe investors should, however, remain optimistic. Despite the ups and downs equities are arguably the best value of all the main asset classes and even at the heights of the market in 2007 the PE ratio on the FTSE All-Share and FTSE 100 Indices were only 14.5x and 13.5x respectively. While economic growth will undoubtedly be slower next year the market has been discounting a recession and worst case scenarios are already priced in, leaving plenty of room for share price recovery. I feel much more comfortable holding depressed cyclical and financial stocks than trying to hide in expensive defensives.
European equity 2008 outlook by Richard Pease, Director of European equities
"The sharp falls in equity markets in Europe in late 2007 suggest that the sub-prime fallout caught most investors off guard. The initial response has been reactionary with financials taking a hammering and cyclical stocks dragged down in the melee. The falls have been indiscriminate with scant regard given to the trading histories or the management experience of companies. Most frustrating has been the fact that many industrial companies with large service or maintenance arms have strong recurrent earnings, yet they are being valued as if earnings were about to collapse.
"These low valuations might be justifiable if Europe was about to enter recession but I believe such an assessment is an overreaction. While the peripheral countries of Spain and Ireland are sensitive to a housing slowdown the core economies of Germany and France are still reporting decent growth and companies have strong order books. European companies dominate in exporting capital goods to emerging markets, countries for which the credit crunch in the west is an irritation but not reason enough to depart from their long-term goals of industrialising.
"Out of adversity comes opportunity and I believe 2008 will see a return to sanity as well-managed, cash generative companies trading at depressed levels enjoy a recovery in their share prices. While the polarisation of the market in late 2007 has rewarded a defensive stance with telecoms and utilities holding up, I believe that real profits can be made in 2008 from companies that have been unduly punished, namely selected industrials and financials. Positive earnings results in the new year could be just the catalyst that leads to their recovery.
While the European economy is likely to grow more slowly in 2008 than 2007 the European Central Bank, along with other central banks, has the scope to loosen monetary policy. The markets will expect a resolution to the credit crunch in 2008 but in the meantime cash-generative companies are likely to take advantage of the conditions to make earnings accretive bolt-ons. We are already beginning to see this through opportunistic takeovers such as Randstad, the Dutch recruitment company's tilt at rival Vedior. Those investors who have biased their portfolios towards well-managed companies with experience of navigating challenging conditions should be well rewarded as sentiment improves through 2008."
Fixed interest 2008 outlook by Theodora Zemek, head of fixed interest at New Star and manager of the New Star Fixed Interest Unit Trust and Managed Distribution Fund
"We are not quite in 'Stingray' territory where "anything can happen in the next half hour" but in such a turbulent market 2008 could deliver everything from reasonably upbeat conditions to a full-blown recession. As such, it is difficult to make any predictions within fixed income other than to say our aim is to stay out of trouble.
"The financial markets are not in an endless downward spiral but with the banking system in disarray we need some resolution of interbank lending rates in order to progress. Central banks recognise this but their policy assistance may have unintended consequences. If they ease rates too much they risk stoking inflation, which is far from dead. In fact, central banks may be being a bit reckless in easing when growth statistics have not yet keeled over. Where pain exists, it is principally in the housing and financial markets, which were the areas of excess the earlier tightening was supposed to put a lid on.
"There are, therefore, three options available for bond investors: one, hide in gilts as a safe haven from the turbulence and potential recession; two, take your chances with the better value available from the credit markets but accept that credit conditions could worsen; three, do nothing and stay put.
"Investors are stuck between a rock and a hard place. Gilts may seem safer but the rising risk of inflation erodes their attractiveness. In contrast, corporate bonds offer better value but a recession could see credit conditions deteriorate. Our position is to sit this out for a few more months and let events unfold, while keeping maturities short. We believe that better value exists in corporate bonds and will look to add credit when sensible. There appears to be little to be gained from being too clever, however, so our preference remains bonds issued by companies with transparent balance sheets."
UK Property 2008 outlook by Roger Dossett, manager of the New Star UK Property Unit Trust and chief executive of property fund management at New Star
"The exceptional returns from commercial property over recent years came to a halt in 2007. The effects of the credit crunch have been more widespread than expected and this has had an effect on a market in which many acquisitions have been financed by debt. In response to falling transaction numbers, valuers have had to value mainly from sentiment, not transactional evidence, and this has resulted in a correction in property valuations.
"As a result, capital losses are being brought forward, suggesting that the market will reach a bottom fairly soon rather than the decline being a protracted process. Further falls in property prices are expected in early 2008 but purchasers are likely to return to the asset class as credit markets loosen later in the year.
"A number of opportunistic funds are looking to exploit the current conditions. They are looking to take advantage of a possible over-reaction, seeing the market as an attractive medium-term play where the fundamental prospects remain sound.
"Despite the fact that the property investment market is suffering short term from reduced liquidity and fluctuating values, the record stretching back many decades shows that property provides solid returns backed by a strong income flow over the medium to long term. This is particularly true of portfolios holding prime buildings whose tenants provide a reliable income even in more challenging economic conditions. It is, therefore, likely that opportunist investors will seize on 2008 as a good year for buying property.
"Prospective yields factoring in rent rises are already approaching 6% across the market so property during 2008 should increasingly offer an attractive return relative to cash and bonds, particularly in light of further expected cuts in official short-term interest rates. Initial yields are already nearing the psychological figure of 5%. This means commercial property should offer a higher yield than gilts, with investors further attracted by the fact that rental income tends to rise over time rather than being fixed as with gilts.
"The differences between prime and secondary properties may increase, with prime properties holding up better. Further weakening in values will be reflected in the prices of real estate investment trusts (REITs) and other property securities. There is likely to come a point, however, when they will be trading at such significant discounts to net asset value (NAV) that a reversion of prices close to their NAVs will follow. Share price recoveries would probably lead to REITs and other property companies re-entering the acquisition market. Recently, it has not been logical for them to buy property because their depressed share prices mean any property is automatically rated at a 25-35% discount to its market value. If, however, REITS and other property companies continue trading at such big discounts to their NAVs, it is likely that there will be takeover activity in the sector in 2008.
"Total returns in all three sub-sectors are expected to be subdued in 2008. Offices are still likely to offer the best opportunities for rental growth as the buoyant conditions of the last few years continue to filter through although the credit crunch and any subsequent postponement of expansion may lead to more muted performance. Retail returns are likely to remain sluggish as consumers react to more difficult borrowing conditions and anaemic real wage growth together with a stagnant housing market. Industrial property is expected to maintain its slow but steady progress.
"Despite increased nervousness in financial markets, UK economic conditions appear robust and, to date, the occupier market has been largely unaffected by the credit crunch. There is increasing value appearing across all sub-sectors and, with the fundamental reasons for investing in the UK commercial property market remaining sound, it is likely that the investment market will see a return to normality in 2008."
International property 2008 outlook by Stuart Webster, head of global property at New Star
"Direct international commercial property continues to grow in popularity as an alternative asset class to equities and bonds. Offering the potential for income and growth, it also provides welcome diversification benefits within a well-balanced portfolio.
The eurozone constituent markets have been experiencing solid expansion with Germany strong, the French economy healthy and the Italian retail sector providing opportunities, particularly in Milan and Rome. Even if global growth slows in 2008, the strength of eurozone economic sentiment should continue to feed through to rental growth in a broad range of sectors. This, combined with strong demand, provides opportunities in property sectors at different stages of their rental cycles.
In Asia-Pacific, economic growth and property returns are likely to be generally higher than in Europe in 2008. We currently favour Japan, Australia and Singapore. Prospects are strong with investor confidence growing and overseas investors making an increasing number of purchases. Japan, the sleeping giant of the region, is beginning to stir and this offers potential. Indicators suggest land will surge in value in certain big cities, notably Tokyo and Osaka, with supply limited. Australia has a transparent, mature property market that yields more than comparable European markets. Property demand in Australia is supported by institutional buying funded by compulsory pension contributions. Singapore is another prime destination for investment. Here, growth is likely to continue to be driven by strong demand from financial services firms, which are good tenants, and supply falling far short of demand."
US 2008 outlook by Greg Kerr, manager of the New Star North American and Global Equity Funds
"I believe that as 2008 progresses the market should grow tired of hearing about the US housing downturn and should start to focus on some of the more positive aspects of the US economy. If we go back over the last 50 years the average length of the residential construction cycle in the US is two and a half years so we should be well past the half way line by early 2008 and looking towards recovery going into 2009.
"Export growth should have narrowed the current account deficit and the federal fund target rate should be low, with the Federal Reserve having reacted to the economic growth slowdown and housing crisis by easing monetary policy. This should be supportive of equities.
"Investors should also begin to appreciate that US equities look good value. Lowly rated financials make up about one third of the value of European indices compared to 19% of the US market, so to strip out financials and the US market is actually cheaper. With higher cash flow returns and traditionally better management US companies are likely to attract investor attention as worries about the slowdown recede. Moreover, the US dollar is cheap on both a trade weighted and purchasing power parity basis. Just ask any European who has recently been shopping in New York. Investors may therefore want to consider loading up on US equities at an attractive exchange rate.
"Finally, the US goes to the polls in November 2008 so the general public will get caught up in the campaign. Since President Bush cannot serve a third term a new broom will be elected and the ensuing optimism should be reflected in the markets."
Asia Pacific ex Japan 2008 outlook by Ian Beattie, investment manager for the New Star Pacific Growth Unit Trust
"Asian stockmarkets considerably outperformed in 2007 as investors sought to participate in the region's high growth rates. The region was even viewed as a 'safer haven' amid the sub-prime crisis in the US, although the protracted nature of the sub-prime fallout means investors in Asia need to sharpen their geographical focus for 2008.
"Investors are likely to be better served by the US interest rate sensitive markets of China, Hong Kong and South East Asia. These should benefit from further US monetary easing in response to the sub-prime crisis and weaker economic trends because their exchange rate regimes import this looser monetary policy.
"By contrast, any softening in US demand will be detrimental to countries in North East Asia such as Taiwan and South Korea. Growth in these countries is more closely tied to the shifting fortunes of US consumers and global economic growth in general.
"Of the sectors with potential, financial stocks remain attractive. Few Asian banks own much sub-prime debt and even fewer use these types of securities to generate growth. As a result, their business models remain intact and unlikely to be downgraded. Property appears reasonable value in relation to wages while the development of urban centres should provide interesting opportunities as demand for prime property, both residential and commercial, grows.
"Among countries, China remains appealing. The growth of consumer banking from small beginnings, rising wages and the wealth effect of rising asset prices create a potent mixture. Attention will also be turned on the country as it hosts the 2008 Olympics. It is even possible that a full blown bubble may develop emanating from China as the country's liquidity stockpile and appreciating currency lead asset prices higher.
India's economy and stockmarket is likely to benefit from the country's proactive and successful recent monetary policies. Falling market interest rates should support industrial production and investment. The country also has a strong domestic consumption sector. The threats to this benign environment would come from political upheaval or a serious deterioration in US economic conditions.
"During 2008 it is possible that certain Asian markets will be viewed as a haven for investors looking to escape the nervous conditions affecting western economies. This is because Asian countries have mostly become creditor nations not debtors. Asia is not suffering from sub-prime issues and does not have severe debt problems. As such global strategists are increasingly seeing the region as lower risk."
Past performance is not necessarily a guide to future performance. The opinions expressed here represent the views of the fund manager at the time of preparation and should not be interpreted as investment advice. The value of investments and any income from them may fall as well as rise and may also increase or decrease as a result of changes in exchange rates between currencies. Investors may not get back the amount originally invested.
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