April 1999

Portfolio management in 1999

A new year with new opportunities to invest, divest or hold your portfolio. Might it be a diversified portfolio of stocks, bonds, real estate and derivatives, a mixed less risky portfolio of treasuries, bonds and some mutual funds or a secure portfolio of treasuries and assetbacked bonds. All need some management or decisions to continue the existence and profitability of the portfolio.

There are essentially two important decisions to make about a portfolio. What is the intention or goal of the portfolio and what level of risk is acceptable. To generate an income or to accumulate wealth. And so secure with a domination of bonds or more risky with stocks and derivatives. These two questions determine the composition of the portfolio. The next step is about the portfolio.

If the personal requirements are established the portfolio can be created. Again a number of decisions have to be taken. Namely active, many trades, or inactive, only the yearly allocation, management of the portfolio. Or a combination of both, active only if necessary. Another option would be to hire a financial institution to do the business for you and leave it to them.

A short history of 1998

1998 was a very volatile year for the economies and on the stock markets. It has shown the best and the worst of what can happen. The U.S. economy showed improved growth figures, Europe showed moderate growth, Asia achieved some kind of stabilisation where as Russia and South America, especially Brazil, experienced a currency devaluation and a shrinking economy.

The stock markets showed an equal volatile behaviour. The first quarter, until April, the stock markets enjoyed an unprecedented growth. After a short interruption in April the markets continued their rise and new records were achieved in July. The Russian crisis and South American currency problems sended shock waves through the world stock markets. The markets turned south and lost between 10 and 20 % of their value. In October an all time low, of the year, was reached.

But at that time the market bottomed as the economic forecasts and company figures proved to be better than anticipated. In November of 1998 a recovery started which would bring the stock markets back to their former heights. The markets closed at a record high on the last day of 1998. After all the year has been better than was expected after the retreat during the late summer and autumn.

The recovery of the stock market was based on a number of reasons. The most important condition for the rebound were the promising economic and business figures of the fourth quarter in the U.S. and to a lesser extent in Europe. This was supported by the low interest rates in the U.S., the strong consumer demand in the U.S., the improving international situation, especially in Asia, the containment of the Russian and Brazilian problems and the availability of an abundance of cash needed to be invested.

1998 ended promising for the next year even if you consider the large number of problems around which could depress the stock markets of the world. Problems like the milennium problem, lagging demand in Europe, the Middle East and Asia, the problems in Russia and South America and an overvaluation of a large number of stocks in the U.S.A. and Europe. But the existence and impact of those problems might prove to be lesser than most of us think.

Rayanalyse internet portfolio

Last year in our 1998 January II issue on our website we proposed and example portfolio. This has been an good mirror on the ups and downs of the stock market. It has shown excellent results but was also hit by the downturn in some sectors like financing and oil and oilservice industries. But even at the lowest level on the stock market indices we still attained a result close to 10 % with the exception of our Asian proposals.

The year result on the portfolio has been in line with the development of the stock markets. If however the portfolio had been managed according to the conditions of low level management the results are above the stock market indices development. Low level management is to act only if the stocks are pressured by developments like accounting irregularities or a loss of more than twenty percent. The rule of cut your losses should then be implemented.

The policy to select quality stocks, stocks of companies with a sound product collection, healthy company structure and finances and superbe management, have been very profitable in 1998. The return of the stock portfolio has been better than anticipated. The average return on our U.S. selection has been over 18 % if no changes were implemented but over 30 % if some little changes, according the above mentioned rules, were used. The European stock portfolio performed more or less the same with a return of over 32 %. The Asian portfolio showed a mixed result. The Asian, Hong Kong, Taiwanese and Singapore, stocks delivered a small positive result of barely 5 %. The Japanese stocks were the disappointing part of our example internet portfolio with a loss of over 6% over the year.

In general the allocation and the selection of stocks of our example internet portfolio has been a right decision in line with the development of economies of the world. Our research, understanding of the markets and our investment policy has proved itself with this performance.

An outlook on 1999

The general situation in the world will be very differentiated. Some parts will be stable but large parts will be very unstable. The unstability is the result from political, economical and social tensions in some countries and regions.

The unstable areas are located in geographical and economical areas which have limited effect on the economies of the leading countries in the world. Regions and countries which have to be dealt with with great care are nearly all underdeveloped and autocratic. Like large parts of Africa, the new countries in the Caucasus, Iraq, Afghanistan, Pakistan, Sri Lanka, Myanmar, Indonesia, parts of the Philippines, North Korea, Haiti, Columbia and Yugoslavia. Other countries with a higher level of risk are Russia, China, some Middle Eastern countries, middle America, Brazil, Venezuela and Cuba.

The countries belonging to the developed world, the U.S.A., Europe, Australia, South American countries like Argenitina and Chile and the Tiger economies in Asia are the most promising in the world. Especially the U.S.A., Europe and Australia will remain as stable as before where as the Tiger economies and South America will see some improvement after the recent problems they experienced.

The economies of the U.S.A., Europe and Australia will continue to show growth. The growth will be lesser than in 1998 but a growth for Europe and Australia of 2-2,5% will be feasible. The U.S. economy will remain the strongest economy in the world. Continuing strong consumer demand will keep U.S. growth at 3,5-4 % in 1999.

1999 will be a good year despite negative comments about the milennium problem, lower demand, high unemployment and an uncertain situation in Russia and Brazil. 1999 does not promise to be paradise and therefore careful stock picking remains very important. And true, some sectors like some parts of the IT industry will experience some slow down but this will pick up in the fourth quarter of 1999 or the first quarter of 2000. Or South America oriented companies will see a drop in sales but a change in markets should be able to alleviate this temporary loss in markets. And finally the market will react brutally on any negative international developments and earnings warnings which will cause a correction. But the strong economic fundamentals in the U.S. and Europe and an improving world economy will stimulate economic growth.

The negative advance/decline line, more stocks loosing value then gaining value, and the high price/earnings valuations of a number of stocks should according to some analysts have a depressing effect on the stock market. This is true for conventional stocks but the majority of the stocks with a high P/E are different from the usual, conventional, companies. These companies value is based on a knowledge based capabilities. Those companies belong to software, pharmaceuticals, insurance and particular strong franchise based operations which allow a higher P/E than used to be in traditional capital and labor intensive companies. This group of companies will continue to boost the stock markets as long as their productline remains in demand.

The negative advance/decline line is more worrisome. The growth of especially the U.S. stock market and to a lesser extent the European stock markets is based on a small group of companies. These companies are mostly knowledge intensive and aimed at the home markets. A wider spread of growth would be desireable but will only happen if the cyclicals and the export and manufacturing oriented companies, or better the world economy, improve. A full recovery will be doubtful in 1999 but the first improvements, a higher demand for manufactured goods and the slow improvement of the world economy, especially South East Asia, will become visible in the fourth quarter of 1999.

1999 will be volatile as there are to many uncertainties and depressing factors around. Growth and corrections will follow but at the end of 1999 the market indices will have reached new highs and the majority of the stock market indices will end far above the current level.

The second halve of 2000 and the first quarter of 2001 will finally bring a decisive improvement in the world economy as the crisis will diminish and demand increase.

Asset allocation in 1999

The need for a balanced portfolio based on quality stocks and bonds which are able to gain a profit in a difficult and volatile year as 1999 will be even more necessary as in 1998. Weak countries and stocks should be avoided as any change in the market will be violent and large. Losses of over halve of the value are possible in such a volatile situation as we are now experiencing.

A portfolio, with limited risk, good growth perspectives, for the medium to long term and with low level management, should be structured like this; 50% stocks, 35% bonds and treasuries,10% property and 5% in liquidities. The low inflation, shorttime opportunities like repos or gilts and the promising opportunities in the fourth quarter of 1999 makes the availability of some extra capital an attractive and profitable option.

The geographical allocation could be like this; 38% in Europe, 5% in Eastern Europe, 42 % in the U.S.A., 4% in South America, especially Argentina and Chile, 4% in Australia/New Zealand, 4% in South-East Asia and 3% in Japan and Hong Kong.

You can either invest directly into the stockmarket or into one or more of the many funds which are offered by several financial institutions. These funds offer an opportunity, with lesser capital, to invest into a larger number of companies than would otherwise be possible. These funds are related to a stock market index, an industrial sector or a geographical region. This would decrease risk, optimise your possibilities and limit the workload and the commissions.

It is certainly adviseable to invest into funds if one or more of these conditions are present; with a limited sum to spend, in emerging countries, if the government regulations are complicated and if information and accounting rules are below western standards.

The markets

As mentioned before there are several opportunities to invest. In country, region, index and industry funds and/or directly into companies which are listed on a stock market.

Investments into Eastern Europe, Hong Kong, Japan, South East Asia and South America can be best done, because of the small scale of the investments of our example portfolio in those areas, through a country, region or industry fund. With the selection of such a fund you should pay some attention to who is managing the fund, what is the track record and how is the assessment of the market and the companies which are part of the fund.

The Eastern European market looks promising in 1999. The influence of the Russian crisis will get lesser as the Eastern European countries are becoming more and more part of the Western European culture and economy. Especially Poland, the Czech republic, Hungary and Slovenia are becoming more stable and are promising the biggest growth of the group in 1999.

The Baltic countries, Slowakia, Croatia, Romania and Bulgaria are still having problems with the change to a market oriented society. High unemployment, poverty, high debts and a large uncompetitive industrial sector are causing problems and are limiting growth. These countries will not see a positive change in 1999. It will take at least another 5 years before they have reached the level of Poland, the Czech republic, Hungary and Slovenia.

Hong Kong has experienced a drop in business activities and growth in 1998. They have managed to keep the currency stable and will most probably be able to do so in 1999. The close connections with China will inhibit growth in 1999. A stabilisation of the current situation is the best what can be achieved. A participation in a fund is the best way to profit from a possible improvement in the economic situation in Asia which might start at the end of 1999. An investment in Hong Kong, China and Japan is however very risky as it might take over two years before a profit can be realised.

The situation in Japan is unlikely to improve in 1999. As long as the population does not consume more, the bad debt problem is not eliminated and the Japanese pecularities of government involvement and criminal activities in the economy are not eliminated the market will remain depressed. The national economy is in a bad shape and a large number of companies are in equal difficulties. Some Japanese companies will however be able to show some growth in earnings and profits. A participation in a Japanese fund with food, retail and export oriented companies could deliver a substantial increase in 1999.

The situation in South East Asia, with the exception of Indonesia, has stabilised. This will lead to a slow recovery in 1999. A participation in a Souh East Asian fund with interests in telecommunications, transport and export manufacturing companies will most probably show the biggest improvement in 1999.

The South American situation is more complicated. Middle America, Columbia, Paraguay, Peru, Ecuador, Bolivia, Guyana, Surinam do not promise to deliver a positive development in 1999. Venezuela and Brazil could show an improvement of the economic situation in the third or fourth quarter of 1999. The new government in Venezuela and an improved oil price could deliver some improvement of the economic situation. Brazil could in the second part of 1999 also show an improvement as the currency and debt problems are solved or brought back to manageable proportions. Only Argentina and Chili seem to be able to generate some growth. The economies of both have been hit by the Asian crisis and the Brazilian currency crisis but the impact could be minimized. A stabilisation and an improvement of the world economy will substantially improve the earnings position of the Argentinian and Chilian companies.

European markets

The international problems and the European inefficiencies in the economy have been a drag on the economic development of Europe. The introduction of the Euro, the new European currency introduced by the majority of European Union members except the U.K., Denmark, Sweden and Greece, have been a positive development to Europe. It will not create short term advantages but on the medium and long term it will strengthen Europe.

The European economy or better the collection of European economies will deliver moderate growth in 1999. An average growth of 2 to 2,5 %, we believe, especially if the world economy improves, a growth of 3-3,5%, will be attainable. There are many problems but the strong economic fundamentals, the slow economic recovery in Asia, the stabilisation in Brazil, the resistance of the majority of the other South American economies to the Brazilian crisis and the positive prospects in Eastern Europe have left the European economies in a good position to expand their growth on the short term, the second part of 1999 or at last in the second quarter of 2000.

1999 will be volatile but it will have a positive direction as the largest economies of Europe, Germany and France, are climbing out of the slow growth period of the last years. The export and consumer demand will continue to be moderate in 1999. It will improve at the end of the year at earliest or at last in the third or fourth quarter of 2000.

The economic outlook for 1999 is moderate positive. But some sectors will perform very well, like financial, pharmaceuticals and services where as capital goods and basic industries will underperform.

The United States of America

The largest economy of the world has experienced an enormous growth in the last four years. The economy expanded at an averge of four percent a year. Increased export and above all very strong consumer demand stimulated growth. It seems as the growth is slowing down somewhat in 1999. This will be lesser than anticipated. The strong fundamentals and the improving world economy will support the U.S. economy. A growth of 3,5-4% will be easily attainable in 1999.

The U.S. will remain strong and the people will profit from this situation. And even more important more savings were realised in the first quarter of 1999 as the personal income rose stronger then personal spending. The increases in personal income does not fuel inflation as the rises are within the production growth of the U.S. economy.

This economy will keep on booming as the performance of companies remains good, interest rates low anf demand high. After 2000 the growth will continue as the world economy, South-East Asia, will finally experience a substantial improvement.

The stock market will mirror this performance in 1999. But volatility with a number of corrections and afterwards recoverings remain a part of the game. The stock markets will see the growth based on a wider group of companies, a rotation from computer manufacturers to oil and oil services industries and continued strength in the pharmaceuticals, financials, retail, telecommunications and some IT companies.

Attractive listings

Nearly all stock markets have a couple of interesting companies which promise to deliver a stabile growth or even outstanding growth in the coming year. These expectations should be based on the performance and capabilities of a company and any company which growth is based on a hype or special media coverage should be avoided.

The companies we list are promising for some growth next year, are based on a good product and are masterfully managed, at least according to our research. We especially like stocks in Europe and the U.S.A. as they are the most promising and less risky.

In the U.S.A. we like AT&T, Bell South, MCI/Worldcom in the telecommunication sector. In the ICT sector we like the software-services side of the business like Computer Sciences, Computer Associates, Wind River, IBM, Lucent, Cisco Systems, and Unisys. In the more hardware side we like Hewlett Packard, Applied Material and Sun Microsystems. In the financial sector we like BancOne, American Express, Citigroup, BankAmerica, Chase, Union Planters Bank, Fleet Financial, Washington Mutual Inc., American International Group, Merrill Lynch and Charles Schwab. In the retail industry we like Walmart, Kroger, Dayton Hudson, Kmart and the GAP. We continue to like in the oil / energy industry Exxon, Texaco, BP/Amoco, Mobil, Unocal and Burlington Resources. In the oilservices industry we like Schlumberger, Diamond Offshore, Baker-Hughes and Transocean Offshore. In the pharmaceutical sector we like Bristol-Myers-Squibb, Eli Lily, Johnson&Johnson, Pfizer, Schering-Plough and Beckman Coulter. We further like General Electric, Lockeed Martin, Raytheon, Textron, General Dynamics and United Technologies in the defence sector. Home Depot, Staples and Abercrombie and Fitch in the office equipment and apparel combination. In the media sector we like Time Warner, Walt Disney and the more technology focussed companies AOL, Barnes and Noble.Com and Amazon.Com. Finally we like, which are more risky and better suited at the third or fourth quarter of 1999, Intel, Texas Instruments, Federal Express, United, Dupont and Monsanto.

In Europe we like the British, Dutch, French, Swiss, Italian and Spanish stock markets and we eye the German stock market with some care. But we continue to support some German stocks. We like DaimlerChrysler and Porsche in the automobile industry. We like Siemens, Mannesmann and MAN in the electric-engineer sector. We continue to support SAP in the IT sector. We like VEBA and VIAG in the mixed sector. In the financial sector we like Deutsche Bank, Dresdner Bank, Allianz and Muenchener Ruck. And in the pharma/chemical sector we like Bayer and Schering.

In Switzerland we like Novartis and Roche in the pharmaceutical sector. Nestle in the food sector. ABB in the engineering sector. And we like UBS and Zuerich Group in the financial sector.

In the United Kingdom we like BP/Amoco in the energy sector. We like British Telecom and Cable and Wireless in the telecommunication sector. We like Pearson and Sainsbury in the publishing and services sector. In the pharmaceutical sector we like Glaxo Wellcome and SmithKline Beecham. In the food and beverages sector we like Cadbury Schweppes, Diageo and Unilever. And in the financial sector we like HSBC, Barclays Bank and the Royal Bank of Scotland.

In France we like Carrefour, Promodes and Pinault-Printemps-Redoute in the retail sector. We like Danone, L’Oreal and Sanofi in the food and consumer products sector. In the financial sector we like Generale d’Eaux and Societe Generale. And in the energy sector we like Total.

In Italy we like Generali, Mediobanca, Banca di Roma and INA in the financial sector. We like Olivetti in the services sector. And we like Telecom Italia in the telecommunication sector.

In the Netherlands we like ABN-AMRO, ING, Aegon and Fortis Amev in the financial sector. We like Unilever, Nutreco and Numico in the food sector. We like Ahold in the retail sector. We like Getronics and Cap Gemini in the IT sector. And we like Royal Dutch Shell/Koninklijke Olie in the energy sector.

To conclude this little list we like Fortis and Tractabel in Belgium. And in Spain we like Argentaria, Banco Bilbao Vizcaya, Iberdrola, Endesa and Telefonica.