Managed Money Reporter Newsletter — Issue 138, August 1998

Editors: Carl Spiess & Allan McGlade

A View from the Trenches

We are fortunate enough to have direct access to comments and views from the many Mutual Fund Managers with respect to the economies and stock markets of the world. With so much turmoil in the markets this summer, we thought you would appreciate a chance to review the often similar and sometimes opposing views from a select group of managers.

Catherine (Kiki) Delaney manages Spectrum United Canadian Equity Fund. Her response to a recent interview follows.

What are your views on the current fundamentals in the marketplace?

In spite of low unemployment in the US, we see limited inflationary pressures. Commodity prices are weak and companies are having a very difficult time increasing prices. As the problems in Asia continue, this will only be compounded.

Our outlook for interest rates remains positive. We see a range of 5.25% - 6.25% in the US and 5% - 6% at the long end in Canada. With inflation in the US around 1.5% and under 1% in Canada, the real rates of return are very large in both countries. Our view is that international turmoil is going to prevent higher rates at the short end over the short term.

We are neutral on our outlook for the economy. Growth was strong; in both Canada and the US during the first quarter. Our view has been that growth would slow down from those very strong numbers. There are a number of reasons for this: trade deficits and the high dollar will have a dampening effect on growth, there are very large inventory levels in the US which should also bring the growth rate down, and the ongoing problems in Asia.

If you look at recent statistics, it really does appear that the economy is slowing somewhat from the rates of the first quarter. Although, there has been quite a split in the US, where there is a very strong consumer/interest side of the economy and a weakening manufacturing economy. The manufacturing industry is responding to pricing problems and to the Asian turmoil.

However, there are two caveats for those of us expecting slower growth - there is very strong bank loan growth and money supply growth. These two factors being strong would suggest that the economy is not about to experience a downturn anytime soon.

What is your outlook for the remainder of 1998?

With markets continuing to be at record levels, we believe markets continue to be susceptible to earnings disappointments and to ongoing problems in Asia. Our overall view is that we expect markets to buy time over the rest of the year and trade in a very broad range. We expect the market to finish the year close to current levels.

Here is an excerpt from a commentary offered recently by Dick Habermann, the lead manager of Fidelity Canadian Asset Allocation.

Interest rate concerns took some of the steam out of both equity and bond markets towards the end of April as it was reported that the Federal Reserve Board had adopted a tightening bias at their last monetary policy meeting March 31. Canadian equity markets were modestly stronger during the month of April, as the TSE 300 index gained 1.5%. This is down from the March TSE 300 index return of almost 6%. Canadian bonds as represented by the DS Barra market index, finished the month returning 0.45%. The Canadian Asset Allocation Fund recorded a 1.36% return during April and continues to have solid performance over one, two and three year periods.

The Canadian economic outlook remains favourable despite some increased nervousness on the interest rate front. February GDP in Canada bounced back after negative economic growth in January due to the winter ice storm. Employment growth continues its strong trend as the unemployment rate fell to 8.4% in April, a 7.5 year low. This should not pose any near term problems in terms of inflation, as there is more slack in the Canadian labour market than there is currently in the U.S. labour market. Trade-related data is showing that the devaluation in Asian currencies is slowing North American exports helping to restrain economic growth, suggesting any interest rate increase going forward should be moderate.

Mark G. Holowesko is the portfolio manager of Templeton Growth Fund. The following is his perspective of the equity markets from an international view.

Over the last quarter, the United States shrugged off a plethora of naysayers to achieve new market highs, Europe delivered almost unfaltering returns and Asia concurrently managed to deliver some of the best and worst equity market returns.

We have been underweight in the U.S. as the market has offered little in terms of value stocks. On most measures the market looks significantly overvalued and, while we have continued our diligent search for bargains, we have discovered few stocks that justify purchases at current price levels. Our current holdings are the best reflection of where we have found value; in a number of cases, we have capitalized on any share price weakness to add to existing positions.

Europe, in contrast, continues to reward value investors with new bargains. The restructuring initiatives underway offer excellent entry points into quality stocks that are selling at significant discounts to their intrinsic value. Targets set out in the Maastricht Treaty and the associated fiscal discipline required have also served as a stable backdrop for the broad restructuring movement presently underway; with inflation held in check, helped in large part by a slack labour pool and interest rate convergence, a liquidity boom has propelled a number of European equity markets to sizable gains.

In Asia, the disparity in returns witnessed over the past quarter has been significant. Thailand and Korea have both generated impressive returns, up over 40% year-to-date according to the Morgan Stanley Capital International Index, as they recover lost ground following their severe declines over the last year. Indonesia, in contrast, continues to underperform, down 22.3% year-to-date and an abysmal 80% from its 52-week high. In some cases, the devaluations in these countries have actually impeded exports as an acute credit shortage has curtailed the necessary import financing required for raw material purchases.

We remain optimistic about the future. The activities and volatility that have typified this quarter only increase the chance that shares will deviate from their intrinsic value, affording us the opportunity to purchase more bargain stocks for the Fund.

To Conclude

As always, we recommend a balanced portfolio of investments unique to your circumstances. Investors in equity funds should have a long-term strategy. While we can always expect the kind of volatility and uncertainty that we have experienced this summer and that is forecasted for the upcoming months, over the long run the stock market has always provided the highest returns. The key is not to be put off by these short-term variations. For a complete review of your investment portfolio and to determine if your exposure to the equity market is suitable for your investment objectives, please call the Mutual Fund Reporter Service Centre at (416) 863-7777 or 1-800-387-9273.

Fund News

AIM and GT Global have merged. The global investment firm AMVESCAP acquired Liechtenstein Global Trust's Asset Management division, which includes the GT Global mutual funds. The former GT funds have been re-named "AIM GT" funds. We have been advised however, that holders of the former GT Global will not have switching privileges to the extended family of funds until the consolidation is complete.

Templeton Management has made a significant capital gains distribution on the Templeton Growth Fund. The distribution is $1.33 per unit and stems from the sale of a number of long-standing positions that had large unrealized gains.

Next Issue

Watch for our feature on the new Pinnacle Program. This fee-based account is ideal for the sophisticated investor with more than $50,000 to invest.


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