Mark Rimmer, fund manager, Premier Miton Multi-Manager Multi-Asset team, considers UK equities against the backdrop of events in the global markets.
The last few months has been a much better period for UK equities, as investors have begun to more fully appreciate the attractions of the market. Having seen a long period of outflows, essentially since the Brexit vote way back in 2016, early indications suggest the tide may be turning. While valuations have been attractive for some time, the new Labour government should offer a more stable political environment, which may appeal to investors given uncertainties elsewhere.
Not only has the broad UK equity market performed better of late, but small and mid-cap stocks have seen a resurgence. The recent rate cut in the UK, taking the base rate down to 5.0%, the first cut since 2020, should also serve to boost sentiment, while recent M&A activity, such as the bid for the miner Anglo American seems to have garnered the attention of investors. Furthermore, UK dividends have continued to grow impressively, and prospects here remain bright, with many sectors, such as banks, reporting higher payouts. Hence from an income standpoint, UK equities remain very attractive, with valuations also still appealing.
In contrast to the UK, in the US the Federal Reserve decided to keep rates on hold, even though they did signal strongly that a rate cut in September was very much in the offing. The US equity market has seen some volatility recently, with a number of high-flying tech shares coming under pressure as some of the Q2 earnings reports have disappointed. With many of the Magnificent 7 stocks ‘priced to perfection’, earnings misses or disappointing guidance on future earnings were in some cases heavily punished. In contrast, similar to the UK, US small cap stocks have been firm, hence there has been a strong rotation from the Nasdaq into the Russell 2000.
On the political front in the US, the shocking assassination attempt on Donald Trump was seen as improving his chances of election. However, this was superseded by the news that Joe Biden was dropping out of the US Presidential race, and that Kamala Harris would be the likely new Democratic nominee for President. While these were undoubtedly important developments, market reaction was somewhat muted, though it was seen as making a Trump victory less likely, while he still marginally remains the favourite. The Democratic convention starts on 19th August, and markets will closely follow whether Kamala Harris continues to build momentum. Either way, political uncertainty in the US remains heightened, which may give investors pause for thought, together with still-stretched equity valuations and low dividends.
In terms of other overseas markets, despite the rate cut from the ECB, European equities remain somewhat becalmed, as the political uncertainty in France unnerves investors, and economic data remains subdued. In Japan, the recent hike in interest rates was a little more pronounced than anticipated, which saw equities weaken while the yen strengthened, after a long period of weakness. However, the corporate governance reforms being undertaken should provide a helpful underpinning to the equity market.
Elsewhere, despite cuts in Chinese interest rates and some supportive measures from authorities, investors remain wary of China, keeping the region as a whole and Emerging Markets under pressure. We think the valuations here are interesting, and with attractive income on offer we are prepared to remain patient for an improvement in sentiment.
While equities benefited from the notion of a soft landing, bonds had a more muted spell, though more recently have fared better as rate cuts and economic slowdown fears have come into play, and inflation, while still sticky in places, is generally better behaved. Corporate bonds have performed well, as despite limited additional yield versus government bonds, the all-in absolute yield levels have proven attractive, and maintain an appeal.
An area that has struggled this year is UK commercial property. We favour niche areas such as primary healthcare, student accommodation and care homes which continue to provide attractive income. Share prices should benefit from the recent better performance of bonds and cut in interest rates that has provided a decent boost to sentiment.
Important information
This information should not be relied upon by retail clients or investment professionals. The views provided are those of the author at the time of writing and do not constitute advice. These views are subject to change and do not necessarily reflect the views of Premier Miton Investors. The value of investments may fluctuate which will cause fund prices to fall as well as rise and investors may not get back the original amount invested. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
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