Great expectations are exorcised as the spectre of a 20-year slowdown stalks the stock markets

What happened to last year's recovery in share prices? Simon Hildrey looks to the future for investors

Just as it seemed safe to return to the stock market, investors have been faced with worrying news.

At the start of last week, the share price of the consumer goods manufacturer Unilever fell by 5 per cent, while Colgate-Palmolive tumbled 10 per cent after both companies issued profit warnings. In the technology sector, Samsung Electronics, the world's second-largest chip maker, warned that global chip sales were likely to grow at half this year's pace in 2005.

These warnings come after nine months of mostly flat stock markets. However, Ken Cox, manager of the Templeton Growth fund, puts them down to the over-optimistic outlook of investors after a recovery in earnings last year. He argues that the initial pace of this recovery from the bottom of the cycle cannot be sustained.

"Earnings growth has generally slowed but the profits warnings are more the result of expectations have risen so much," says Mr Cox. "These warnings are not as severe as they have been in the past."

Yet fund managers remain cautious. Many are predicting that returns are likely to be flat over the next few years.

On the plus side, companies have strengthened their balance sheets and increased cashflow. Mr Cox says that European companies had free cashflow of £116 trillion last year, compared with £34.14 trillion in 2000. In the US, 376 of the 500 companies listed on the S&P index have increased dividend payments to shareholders this year.

But not everyone is convinced that share prices currently offer investors great value. Mr Cox says European share prices are relatively cheap as they are trading at a 30 per cent discount to the US market, but some fund managers suggest the US market needs to fall by at least 10 per cent to provide attractive valuations.

William Pattisson, manager of the Liontrust First Large Cap fund, says the UK market would need to fall from its current level of around 4,600 to nearer 3,000 to offer attractive valuations, but he is not convinced this will happen.

His colleague Jeremy Lang, manager of the Liontrust First Income fund, believes markets will generally be flat from here to 2010. But Mr Lang argues that money can still be made in the UK by identifying sectors with medium-term momentum behind them, together with companies generating strong cash- flow and therefore dividend growth.

Keith Wade, chief economist of Schroders, thinks the US economy will grow by 3 per cent next year - a prediction he says relies on corporate spending. "If spending does not pick up, then we are looking at very low economic growth," he explains. "If the economy slows, companies may hold back. But profits are relatively high and we believe companies generally can afford an expansion in expenditure."

Fund managers are also concerned about the impact of inflationary pressures and a potential slowdown in economic growth caused by high energy and commodity prices. Mr Wade estimates that if oil remains at $40 a barrel, it will knock 0.5 per cent off global economic growth.

Other risks include a possible decline in consumer spending as interest rates rise in many developed countries, and a fall in house prices in major economies. In the US, we could see an increase in taxes, cutbacks in government spending and a weakening of the dollar. There are also issues such as how US companies will fund their pension liabilities; the risk of another major terrorist attack; and how the government will reduce spending while it is committed to having troops in Iraq and Afghanistan.

While he is optimistic about Asia generally, Mark Mobius, manager of the Templeton Global Emerging Markets fund, warns: "The deficits in the US may cause a further loss of confidence in the US dollar and treasuries [government bonds]. One of the biggest risks for Asia is a weakening in the US dollar, leading to a reduction in Asian exports which is not offset by an increase in domestic consumer spending. There is a 50:50 risk of this happening."

Hugh Hendry, manager of the Odey Continental European and Pan European funds, is more pessimistic because equities, bonds, property and collectables have all risen in value over the past 25 years, in some cases by 20 times. He argues that the loose credit policy of major economies cannot go any further, and all assets apart from commodities are expensive.

"The next 20 years will be very different from the last 20," he says. "Either there will be a sharp correction and then equities will reach attractive valuations again, or stock markets will remain flat for many years until earnings and profits grow to justify the current prices."

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
Arts and Entertainment
Outlaw Pete is based on an eight-minute ballad from Springsteen’s 2009 Working on a Dream album
arts + entsFirst tale will be about bank-robber called 'Outlaw Pete'
News
Bill Kerr has died aged 92
people
News
Angelina Jolie with her father Jon Voight
people
Sport
footballPremiership preview: All the talking points ahead of this weekend's matches
Arts and Entertainment
Tulisa as a judge on the X Factor in 2012
tvLouis Walsh confirms star's return
Life and Style
fashionClothes shop opens on Bill Clinton Boulevard in Pristina
Arts and Entertainment
Warner Bros released a mock-up of what the new Central Perk will look like
tv'Friends' cafe will be complete with Gunther and orange couch
News
Keira Knightley poses topless for a special September The Photographer's issue of Interview Magazine, out now
people
Voices
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
Life and Style
tech
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SAS Business Analyst - Credit Risk - Retail Banking

    £450 - £500 per day: Orgtel: SAS Business Analyst, London, Banking, Credit Ris...

    Project Manager - Pensions

    £32000 - £38000 Per Annum Bonus, Life Insurance + Other Benefits: Clearwater P...

    KYC Analyst, Birmingham - £200-£250 p/d

    £200 - £250 per day + competitive: Orgtel: KYC Analyst, Key Banking Client, Bi...

    Test Manager - Banking - Yorkshire - £450 per day

    £400 - £500 per day: Orgtel: Test Manager - Banking - West Yorkshire - £400-£5...

    Day In a Page

    Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

    The phoney war is over

    Russian troops and armour pour into Ukraine
    Potatoes could be off the menu as crop pests threaten UK

    Potatoes could be off the menu as crop pests threaten UK

    The world’s entire food system is under attack - and Britain is most at risk, according to a new study
    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
    From Mozart to Orson Welles: Creative geniuses who peaked too soon

    Creative geniuses who peaked too soon

    After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
    Caught in the crossfire of a cyber Cold War

    Caught in the crossfire of a cyber Cold War

    Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

    Salomé: A head for seduction

    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
    From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

    British Library celebrates all things Gothic

    Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
    The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

    Is the Hard Rock Café worth fighting for?

    The restaurant chain's owners are currently embroiled in a bitter legal dispute
    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

    In search of Caribbean soul food

    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
    11 best face powders

    11 best face powders

    Sweep away shiny skin with our pick of the best pressed and loose powder bases
    England vs Norway: Roy Hodgson's hands tied by exploding top flight

    Roy Hodgson's hands tied by exploding top flight

    Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
    Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

    Di Maria and Ronaldo: A tale of two Manchester United No 7s

    They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
    Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

    Robert Fisk: No victory for Israel despite weeks of devastation

    Palestinians have won: they are still in Gaza, and Hamas is still there
    Mary Beard writes character reference for Twitter troll who called her a 'slut'

    Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

    The Cambridge University classicist even wrote the student a character reference
    America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

    America’s new apartheid

    Prosperous white districts are choosing to break away from black cities and go it alone