Continued dramatic declines in the US housing market, the seizure of global credit markets, deteriorating corporate earnings results, declining consumer confidence, and what appears to be the start of an upward trend in unemployment figures, suggest that the US may be entering a consumer-led recession.
However, Peter Kaye, manager, Melchior North American Opportunities Fund (MNAOF), sees excellent opportunities developing as we progress into 2008. What differentiates this environment from the last recession, in 2001, is a very low level of valuations especially relative to bonds.
A comparison with the recession in 1990, which was also property-led, suggests a bottom in the market may not be that far away. Aggressive interest rate cuts by the Federal Reserve could provide a powerful catalyst. Kaye considers that, in the very near term, expectations for 2008 earnings still seem too high and the current fourth quarter earnings season may provide the opportunity for companies to be conservative with their guidance.
Therefore, he has reduced the risk of the fund by raising cash going into this period but sees compelling opportunities developing on which he intends to capitalize.