The UK stockmarket at the time of writing is flat for the year, masking several significant positive...
The UK stockmarket at the time of writing is flat for the year, masking several significant positive and negative trends. On the negative side, global GDP growth expectations are falling due to significant weakness in the US and UK consumer economies. This weakness is the result of high levels of consumer borrowing combined with a crisis in the banking system. The need to rebuild the savings ratio in the US and UK economies means that weakness in the consumer is likely to be protracted, even if interest rates in both countries are reduced.
To balance this there is significant growth in the emerging economies of China, India and other parts of Asia. This growth is currently significant enough to prevent the global economy from falling into recession and has resulted in high commodity prices. This is very relevant as commodity stocks make up 25% of the UK stockmarket. UK companies with operations in Asia continue to trade strongly.
The year ahead is likely to see a continuation, if not deepening, of these trends. A fall in global GDP growth will result in the end of the margin expansion that many lower-quality cyclical companies have enjoyed over the last few years. As a result, UK and US consumer stocks, and lower-quality industrial and technology companies, are likely to see downgrades and profit warnings. In this environment we expect the market to move towards quality companies and to focus increasingly on those companies that are capable of achieving top-line growth.
It is worth remembering that UK equities remain very good value compared with other asset classes, such as bonds and property, with the price/earnings ratio and cashflow yield of the market both looking extremely attractive. We therefore believe that equity valuations can make progress provided that individual stock selection remains good and takes account of macro-economic trends. Funds that hold the right stocks can still make good returns for their investors and certainly better returns than are probably available in the likes of commercial property at this moment.
- US and UK consumer weak;
- Emerging economies such as Asia strong;
- UK equities remain good value.
Paul Bruns and Elaine Parkes
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