We have become more confident in the outlook for the UK and the US equity markets in recent months w...
We have become more confident in the outlook for the UK and the US equity markets in recent months while at the same time becoming a little more cautious on the prospects for the Pacific Rim.
Interest rates may yet move higher in the UK, but are unlikely to move significantly higher.
In turn this should help profits growth to beat expectations. From a structural point of view, the more modest returns likely to be seen from the technology sector from here have increased the attractiveness of the UK equity market, which, in spite of widespread press coverage, has only a small weighting in the technology sector.
This contributed to a relatively disappointing performance against other markets last year, when sentiment in these companies was particularly strong. With performance now focused on more defensive areas, this low weighting is no longer a disadvantage.
The other area where we have become more positive is in the US. Here too, we believe we are at, or close to, the peak of the cycle in short-term interest rates.
The rising interest-rate trend was previously one of the main reasons for our cautious stance on the US.
However, the economic data we are now seeing suggests the pace of economic growth will moderate in the second half of this year, easing fears both about inflation and the possibility of a sharp contraction in the economy. Although it is perhaps premature to favour this market over others, we believe it is also no longer appropriate to be quite so cautious on the outlook for the world's largest equity market.
At the same time, we have tempered our views slightly on the Pacific Rim. We remain positive on these markets, where there is good scope for earnings surprise over the coming year. However, our view is now closer to the consensus than last year as the growth recovery has become a widely accepted reality.
Our optimism on corporate earnings growth partly reflects the strengthening economic recovery in the region, although the good momentum behind corporate restructuring is also a positive influence. Elsewhere, we continue to prefer a neutral weighting in Japan so long as the pace of economic growth remains mediocre and it remains to be seen how far restructuring will be followed through.
We are still positive on the prospects for Continental Europe, expecting firm growth this year and next to support a healthy rebound in corporate profits with only limited rate rises needed from here.
Although we are still seeing a large amount of sector rotation, it is encouraging to see that merger and acquisition activity has started to pick up again, most notably in the financial and telecoms service sectors.
Two global vehicles
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Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till