In the UK, the economic data continues to hold up relatively well, a trend which looks set to contin...
In the UK, the economic data continues to hold up relatively well, a trend which looks set to continue, with the consumer sector remaining relatively firm, notwithstanding some understandable weakness in the housing market. As a consequence, the top-down UK earnings look more resilient than elsewhere in the world, reinforcing the relative attractiveness of the UK. While the stream of profit warnings from the corporate sector is well advanced, further significant deterioration seems 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 very 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.
Furthermore the defensive rotation, which has 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.
In conclusion, while investors should have no illusions about the poor immediate outlook for profits, 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 more likely to be the dominant theme than the desire for safety.
Jon Thornton is head of UK Equities at Aberdeen Asset Management
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