By Mark Lovett is head of UK institutional equities at Dresdner RCM Global Investors Even after ...
By Mark Lovett is head of UK institutional equities at Dresdner RCM Global Investors
Even after taking into account the likelihood of a third successive year of negative returns from equities, it has been a frustrating year for UK equity fund managers.
While far from isolated from the effects of the dismal global economic environment, the relative resilience of the UK economy has been exceptionally encouraging. This economic achievement, accompanied by superior earnings progression, has not manifested itself in outperformance for UK equities relative to their peers however.
The strong and tight correlation between the UK and US stock markets over the last five years has remained in place with both markets falling by similar amounts year to date.
The strength of the bond, despite divergent economic performance this year, is a timely reminder of the dominant influence Wall Street has on the global investment community.
The resilience of the UK economy has centred on the continued growth in consumer expenditure.
Such growth has been buoyed by interest rate cuts and the strength of the housing market, which has provided an additional form of credit for individuals via equity withdrawal.
While recent house price inflation is clearly not sustainable, we do not subscribe to fears of a bubble, perhaps with the exception of parts of London where the buy-to-let market has been a powerful influence.
The positive employment data has also ensured improved levels of disposable income resulted in consumption growth rather than an increase in the savings ratio.
The economic performance in the UK contrasts with the more challenging environment in the US and Europe. In the US, once again the housing market and the re-financing boom have underpinned consumer expenditure.
The structural impediment of exceptionally high levels of consumer and corporate indebtedness, as well as the shadow of deteriorating employment prospects, limits the possibility of a strong and rapid return to above trend growth.
If we anticipate the UK stock market will continue to mirror the US, an assessment of the likely performance of Wall Street is essential. While the rally so far in October is a welcome relief, our view is that without improving economic data valuations do not give enough latitude for a sustained improvement from this level.
The economic data in the US and Europe does not appear to be stabilising and of most concern is evidence that consumer confidence in the US is deteriorating.
Our focus remains on investments in companies with strong business franchises, committed management and the ability to generate profit and cashflow growth in a subdued economic environment.
With the historical correlation with Wall Street almost certain to continue, the outlook is for an environment where it could continue to be a frustrating period to be a UK investor.
Resilience of UK economy.
UK equity valuations attractive.
Evidence of takeover and merger activity.
US economy weakening and at risk of double dip.
Strong link between US and UK stock markets.
Housing market may restrict interest rate cuts.
Service increasingly key
Aiming to be' top three' UK financial planner
Lowest measure since index launched in 1995
Complaints into double figures
Despite lower median annual earnings