By Jon Thornton, head of UK equities at Aberdeen Asset Management While the economic and geopolit...
By Jon Thornton, head of UK equities at Aberdeen Asset Management
While the economic and geopolitical implications of the events of 11 September remain uncertain, what is clear is that corporate earnings visibility has deteriorated even further. The terrorist action against the US has seemingly deepened and extended the already threatening global downturn and has had a clearly negative impact on US consumer and business confidence at a time when this was already low.
Nevertheless, with the US inventory cycle and production downturn already extremely mature and the global monetary policy response aggressively accommodative, investors have begun to consider the probability of a stronger stimulus to global growth during the second half of 2002.
As a result, with hostilities seemingly contained and the oil price weak, equity markets have been able to stage an impressive recovery from September's precipitous capitulation.
In the UK, the economic data continues to hold up relatively well, a trend that looks set to continue, with the consumer sector remaining relatively firm, notwithstanding some weakness in the housing market. As a consequence, top-down UK earnings look considerably more resilient than elsewhere in the world, reinforcing the relative attractiveness of the UK.
However, while the inevitable stream of profit warnings from the corporate sector is well advanced, further deterioration seems very likely.
Nevertheless, on any sensible investment horizon, we would be inclined to be positive on UK equities. The market continues to offer good value on most conventional fundamental valuation criteria and looks extremely attractive against gilts.
The technical (liquidity) backdrop remains very supportive, with institutional cash weightings at historically high levels while, of course, the return on cash continues to fall. Meanwhile, directors are buying at a healthy rate.
Furthermore, the defensive rotation, which has so dominated sector leadership for 18 months, looks significantly extended, notwithstanding the recent short-term correction. In other words, the insurance premium demanded for earnings safety is still at sky-high levels.
Indeed, although we already have a pro-growth/anti-defensive bias in all our mainstream UK equity portfolios, we have been seeking opportunities to increase our growth and cyclical tilts further since 11 September.
The key to the success of this strategy will be sufficient evidence that the US economy, the engine of world growth, has turned the corner, which we hope will become more evident around the end of the first quarter of this year and into the second.
While investors should have no illusions about how poor the immediate outlook for profits is, valuation, monetary policy and liquidity are all strongly supportive of UK equities. Although the ride seems likely to continue to be extremely rocky for some time, the 12-month outlook is really quite attractive, with the search for growth and recovery more likely to be the dominant theme than the desire for safety.
Global monetary policy aggressive.
Strong stimulus to global growth in 2002.
UK economy continues to hold up well.
Earnings visibility deteriorating further.
Attacks threaten consumer confidence.
Volatility likely to remain extreme.
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