Market volatility will continue, says Pratt

Glenn Pratt, manager of the Newton Income fund, says that the economic recovery is not guaranteed and world stockmarkets are likely to continue to be volatile.
Pratt took over the Newton Income fund in December last year from interim manager John Wood. The fund had been run for 16 years by Robert Shelton, who was forced to relinquish management of the fund after a serious car accident.
Pratt says that he can still find many reasons to be cautious about the global economy and is positioning the fund towards stocks that are not dependent on a recovery.
He says that a number of indicators are giving cause for concern. Surveys giving the ratio of upgrades to downgrades show that confidence among analysts about the outlook for corporate profits is at its highest level since the internet boom of 2000. Pratt believes there is little reason for analysts’ confidence to rise any further.
High levels of director selling are also a worry for Pratt. Directors selling their company stock currently outnumber directors buying their stock by 4:1. He sees froth in China, particularly in the IPO market and points to a recent IPO for China Green, which was 1,600 times oversubscribed. He adds: “This is a company that grows onions and cabbages. It looks a bit toppy.” He is also worried about the debt burden on the US consumer, labelling it a “timebomb”.
Pratt believes that companies will have to start demonstrating strong top-line growth. Profit growth has been coming from a combination of lower interest rates and cost-cutting, but Pratt says this has now run its course. He says that cyclical and technology stock valuations are looking particularly stretched.
Pratt has not altered the positioning of the fund since taking it over. He is overweight in telecoms, including Vodafone and mmO2 in the UK, as mobile operators are benefiting from new users in both the UK and developing countries.
He also like outsourcing groups such as Capita, as the trend continues for governments and other groups to outsource certain of their functions due to cost concerns.
Pratt is also taking advantage of increased spending on defence by the US to top up his exposure to aerospace and defence stocks, including Cobham and Smiths Group.