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23/02/2017
Equity strategy and market outlook - February 2017
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In this month’s strategy piece, Alastair George believes that little has changed in the global outlook during the past month and we remain cautious on equities, primarily based on valuation concerns. Earnings estimates do not thus far seem to be tracking the improvement in survey data leaving global market valuations at the upper end of historical ranges. We believe the recent surge in French sovereign risk relative to Germany highlights the imbalances at the core of the eurozone, which has this time manifested in a striking divergence of French and German macroeconomic performance post-2008. We would suggest the euro is not yet out of the woods.
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26/01/2017
Equity strategy and market outlook - January 2017
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In this month’s strategy piece, Alastair George believes that even as headlines trumpet the arrival of Dow 20k, we are becoming increasingly concerned that the conditions for a sudden shift lower in equity markets are in place. The combination of high valuations on a global basis and the prospect of tighter US monetary policy in 2017 is sufficient reason to be cautious and a stronger dollar is unhelpful for risk assets. However, it is political uncertainty which is giving us pause for thought. Investors’ high degree of confidence in Trump’s growth- and US-friendly policies contrasts with the willingness to downplay the more worrisome components of Trump’s policy package, which lean strongly towards protectionism and a go-it-alone US foreign policy.
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15/12/2016
Equity strategy and market outlook - December 2016
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In this month’s strategy piece, Alastair George writes that as there have been few changes in the investment outlook since our last update in this final note for 2016 he has reviewed our calls for the year. This is an important exercise for discovering any potential bias in our strategy forecasts. We are pleased to discover that the hits clearly outnumber the misses although the timing of our ‘buy’ ideas were much better than our ‘sells’ and the bias towards caution was unhelpful this year. For 2017, Alastair continues to believe US government bond yields are on a rising trajectory and maintains a cautious view on global equities, primarily on valuation concerns. Furthermore, a rising US dollar is likely to be negative for emerging markets and corporate profits forecasts globally. A period of underperformance for global equities cannot be ruled out for Q117, or at least until the uncertainty in respect of the interaction between US monetary and fiscal policy has been resolved.
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24/11/2016
Equity strategy and market outlook - November 2016
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In this month’s strategy piece, Alastair George believes that Trump has surprised markets twice over, first with a Presidential victory and second a rally in risk assets. Alastair views this rally as largely due to investor positioning as nothing new has emerged from the Trump camp since the election. Investors should however continue to focus on valuations and the direction of monetary policy, even as he asks the question whether “Make America Great Again” could be compared to Draghi’s “whatever it takes” OMT announcement. A key difference is that in 2012 many asset markets in Europe were trading at distressed levels and this is not the case in the US in 2016. Therefore, while in some regards there may be a parallel, he does not change his cautious positioning on equities.
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27/10/2016
Equity strategy and market outlook - October 2016
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In this month’s strategy piece, Alastair George believes that in an environment of increasing political turbulence, markets have sought comfort in relatively stable earnings estimates. He believes longer-term investors should consider trading earnings revisions to their advantage and overweight exposures to commodities, commodity equities and energy are no longer contrarian and should be reduced. In currency markets, the decline in sterling is much less surprising in the context of its significant prior overvaluation; Brexit has merely acted as a catalyst. Sterling is likely to remain volatile and relatively weak for some time, but current levels now reflect the known Brexit risks. He also believes investors should be screening for UK companies which are likely to benefit from weaker sterling with share prices that have underperformed international peers.
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30/09/2016
Equity strategy and market outlook - September 2016
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In this month’s strategy piece, Alastair George believes central bank influence may have reached its high watermark and the tide is now turning towards fiscal policy. While supportive of GDP growth, investors who have become conditioned to riding the waves of monetary stimulus in recent years should not necessarily assume such a switch in policy focus will be positive for asset prices. With bond yields at record lows and equity valuations near the top of historical ranges following the strong rally in 2016 to date, he believes investors should now be looking to lower exposure to both asset classes and increase allocations to lower risk investments and cash.
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25/08/2016
Equity strategy and market outlook - August 2016
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In this month’s piece, Alastair George believes that over the last six months, markets have been driven higher by easier than expected monetary policy in the US and UK. In the UK at least the anticipated economic slowdown has so far failed to materialise, leading to a short-term win-win for equity investors. Therefore, despite very high valuations, with global earnings estimates being revised upwards equity markets are likely to remain buoyant. However, looking towards 2017 and as central banks question the benefits of negative interest rates and the focus turns to fiscal policy, Alastair believes investors may wish to start taking take profits in government bonds. Having enjoyed the relief rally, he also believes equity investors should maintain discipline and look to take profits on positions in overvalued sectors which may represent bond proxies.
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28/07/2016
Equity strategy and market outlook - July 2016
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In this month’s piece, Alastair George believes that the worst fears over Brexit have failed to materialise and clearly we are not currently looking at a self-reinforcing cycle of declining UK markets, expectations and investment nor systemic implications for the rest of the world. However, he believes the very negative UK survey data cannot be entirely dismissed and close attention should be paid to the evolution of these data series over the summer. Following the rebound in market prices, median UK equity valuations remain expensive in aggregate and growth prospects for sales and profits remain weak. He believes investors’ portfolios should remain cautiously positioned.
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04/07/2016
Equity strategy and market outlook - June 2016
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In this month’s strategy piece, Alastair George believes that the UK’s vote to leave the EU has created a political crisis and a significant degree of economic uncertainty. However, mutually assured economic destruction between the EU and UK will only be a negotiating tactic and not a strategy in his view. The uncertainty is likely to slow the UK economy and once again he believes investors are rather too ready to look through slowing fundamentals and are focused only on the direction of monetary policy. In this respect bonds may have be headed in the right direction but he remains cautious on equities.
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26/05/2016
Equity strategy and market outlook - May 2016
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In this month’s strategy piece Alastair George believes that the combination of slow growth and high valuations is pointing to a period of low returns for US, UK and European equities over the medium term. The latter years of the 20th century appear to have been an exceptional period for equities where buy and hold or “time in the market” strategies may have fitted the then prevailing investment parameters but seem less applicable now. Separately, the most recent Fed minutes highlight that a June rate increase is clearly a possibility, absent a repeat of the market volatility seen in Q116. Earnings forecasts may have stabilised but show little sign of upward momentum, which in our view is a necessary condition for any further sustained increases in market indices.
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28/04/2016
Equity strategy and market outlook - April 2016
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In this month’s strategy piece, Alastair George believes the risk of an actual Brexit is modest as polls indicate the “Remain” campaign is still on target to win the vote. However, the uncertainty surrounding Brexit may be opening up a relative valuation anomaly, as the combination of the decline in sterling and the underperformance of the UK market leaves export-led UK industrials at a significant discount to US peers. With growth expectations similar for both indices, UK investors should stay aware of the potential for M&A, despite relatively low levels of activity during 2016 to date. Separately, we remain of the view the relief rally which started in February is largely behind us. Oil prices have risen to levels more consistent with long-run marginal supply and commodity prices look to have run ahead of improvements in the economic data. With the reduction in financial market volatility, we also believe the US Fed is on course for a rate increase in June.
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24/03/2016
Equity strategy and market outlook - March 2016
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In this month’s strategy piece, Alastair George believes volatility has declined as central banks have taken policy divergence and European bank credit stress risks off the table. However, it is still too early to call an upturn in corporate profits forecasts. Though the rate of decline may have slowed, we still have to date insufficient evidence of an upturn in corporate profits – which is key for markets to move significantly above current levels. He expects global equity markets to be range-bound during April as the next incremental shift in US monetary policy is likely to be hawkish. In addition, the recovery in commodity prices has been rapid and progress is likely to be slower from here.
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25/02/2016
Equity strategy and market outlook - February 2016
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In this month’s strategy piece, Alastair George believes that the recent bank sector mini-panic has been counter-intuitively embraced by investors as a positive event, by arm-twisting central banks into providing more monetary stimulus. He believes the economic outlook remains uncertain but also that at least in the US and UK, earnings estimates have stopped falling for the first time in a year. He highlights the early-stage talks amongst oil producers and the impact on the bank sector of negative interest rates, questioning the likely benefits of the latter. Investors should in his view not over-react to Brexit which is largely a political event and instead remain focused on equity valuations and the economic outlook. Globally, high yield bonds have fallen to levels which appear to discount many adverse economic scenarios (with the exception of a full-blown financial crisis), unlike global equities where valuations remain extended and where he therefore remains cautious.
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28/01/2016
Equity strategy and market outlook - January 2016
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In this month’s strategy piece, Alastair George highlights that in 2016 markets have moved fast but insufficiently far for us to change our cautious strategic view (much as we would like to!). As we expected, the yield curve has flattened to correctly reflect a slowing pace of economic activity. Equity markets have fallen, but they have not de-rated and do not offer sufficient value to be immune to further downgrades. To become more positive on equities we would need to see still lower valuations or have increased confidence that the US dollar has peaked, in addition to some evidence that the pace of earnings downgrades has slowed.
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17/12/2015
Equity strategy and market outlook - December 2015
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In this month’s strategy piece, Alastair George highlights that although the Fed has only just raised rates, financial conditions have been getting tougher for some time as investors re-price credit and emerging market risks. While this was always going to be a very gradual tightening of US interest rates, recent market events already highlight the possibility of a pause in Fed rate increases – or even a reversal – during 2016.
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26/11/2015
Equity strategy and market outlook - November 2015
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In this month’s strategy piece, Alastair George highlights the remarkably slow pace of revenue growth in developed markets compared to the pre-2008 period. With profit margins high and dividend cover already close to cycle lows, the outlook for dividend growth is inconsistent with still high equity market valuations. Slowing dividend growth cuts into the heart of the argument for substituting equities in place of low-yielding debt and, in our view, is the biggest threat to long-term equity performance. While desirous of becoming more positive on the outlook for 2016, we are not desirous of losing money. Therefore, we remain cautious on developed market equity indices based on our growth and valuation concerns. In 2016, we believe investors will have to stay focused on company-specific ideas rather than relying on market gains to drive portfolio performance.
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29/10/2015
Equity strategy and market outlook - October 2015
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In this month’s strategy piece, Alastair George believes that incoming data during October continues to indicate that global economic and profits momentum is slowing, yet markets have rebounded strongly from the lows of September. Given the strong hints that the ECB will be loosening monetary policy further in December, yesterday’s hawkish FOMC statement strikes a somewhat discordant note in this risk-on period for the markets. The initially positive US equity market reaction to the statement may well prove unsustainable. To us, subject to stable market conditions, the Fed appears much less dovish than we thought one month ago. While the looser-for-longer global monetary policy outlook may have been a reason to hold off from panicking out of equities during August, it is not at all clear that October’s mini rally will run much further without implicit encouragement from the US Fed.
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24/09/2015
Equity strategy and market outlook - September 2015
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In this month’s strategy piece, Alastair George believes that the initially positive reception to the US Federal Reserve’s decision to defer a US rate increase has given way to investors’ increasing doubts over global growth. We believe equity markets will continue to be volatile and cannot exclude the possibility of further declines unless the US Fed drops a strong hint that further QE is a possibility for 2016. The growth slowdown is spreading to the US and a variety of US economic data are highlighting a loss of US economic momentum. In our view, investors should avoid the mistake of believing developed markets can ‘decouple’ in a highly interconnected global financial system. We have however become more positive on high-quality government bonds where yields now look more sustainable at current levels given the economic uncertainty.
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27/08/2015
Equity strategy and market outlook - August 2015
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In this month’s strategy piece, Alastair George has characterised the recent market declines as a long overdue correction that brings valuations closer to long-run averages, triggered by volatility in China’s markets and declining global growth expectations. Unless there is a forceful response from the US Federal Reserve, which we believe is unlikely in the short run, markets are therefore unlikely to stage a sharp recovery to earlier levels. We note that our universe of European large-cap growth stocks remains at a significant premium to long-run valuation levels. However, perhaps unsurprisingly, the basic materials sector is now trading at a significant discount. Investors prepared for the long haul may wish to consider lower-cost operators with balance sheets able to ride out a cycle.
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30/07/2015
Equity strategy and market outlook - July 2015
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In this month’s strategy piece, Alastair George sees few reasons at present to become more positive on global equities. In the last few weeks Greece may have been the primary source of ‘headline’ risk, but in our view recent equity declines have been driven by several other factors such as a collapsing equity bubble in China and sharply declining commodity prices. Subtle changes in July’s FOMC statement compared to June suggest the day US interest rates ‘lift off’ is drawing closer and, combined with still high equity valuations, this points to a challenging investment outlook.
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25/06/2015
Equity strategy and market outlook - June 2015
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In this month’s strategy piece, Alastair George believes markets jumped to the conclusion that Greece was a done deal, only to find that the two sides remain as far apart as ever, despite the high-level desire to get a deal done. In the US, lowered growth and interest rate forecasts from the FOMC confirm our view that US rate increases during 2015 will be too slow to power a market-unfriendly rise in the US dollar. We continue to believe equity markets are very highly valued, having reviewed 450 faster-growing companies in Europe, and see US and UK bond yields drifting higher with rising headline and wage inflation into H215.
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28/05/2015
Equity strategy and market outlook - May 2015
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In this month’s strategy piece, Alastair George can see no compelling reasons at present for US and European equities to trade significantly above or below current levels in the short-term. The positive economic surprise in Europe during H115 may have driven the reflation trade which pushed energy prices, equity markets and bond yields higher but expectations have now caught up. Embracing exposure to Russia when valuations were discounted early in the year has proved profitable, as has underweight positions in European government bonds. We believe the key risk for investors is US economic growth as economic data continues to disappoint.
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30/04/2015
Equity strategy and market outlook - April 2015
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In this month’s strategy piece, Alastair George believes that the recent weakness in the US economy may benefit emerging market equities as the US dollar rally stalls and the Fed stays on hold for longer. On the basis of relative valuations it may now be time to take profits in European and US equities and increase weightings in emerging markets, even if on an absolute basis emerging market valuations are only in line with long-term averages. Our cautious portfolio strategy outlook is retained on the basis of very high valuations across developed market equities. In addition, we believe bond yields in the core of Europe have declined to levels that represent an attractive exit opportunity.
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26/03/2015
Equity strategy and market outlook - March 2015
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In this month’s strategy piece, Alastair George highlights the divergence in economic prospects between a slowing US and accelerating eurozone during Q115. This divergence is also clearly evident in profit forecasts and year-to-date relative equity performance. However, investors should still be mindful of valuations; German non-financials now trade at multiples of book value that have not proved sustainable in the past. Value is still difficult to find in equity markets, but the mining and energy sectors are two of the few that remain cheap in a historical context. However, in general the pain the active investment management community feels with valuations stretched but prices still rising is palpable. We believe the appropriate response to aggressive and experimental central bank policy is caution and investment discipline, even if it is only when the monetary tide goes out that the benefits of such a strategy become clearer.
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26/02/2015
Equity strategy and market outlook - February 2015
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In this month’s strategy piece, Alastair George believes that while the pace may be glacial, we believe the US Fed will embark on the long process of returning US monetary policy to a neutral stance in the second half of the year. US unemployment continues to decline, wage growth is improving and the one-off impact of the decline in the oil price will fall out of the annualised inflation rate by Q315. Equity valuations in each of the US, UK and eurozone remain at high levels. The correlation between medium-term equity returns and valuation measures is relatively strong and as US monetary policy normalises we believe valuation will become an increasingly relevant factor for markets.
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29/01/2015
Equity strategy and market outlook - January 2015
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In this month’s strategy piece, Alastair George believes that the ECB’s QE programme is a necessary policy to avoid an undesirable increase in real yields across the eurozone. We currently see some scope for positive economic surprises in Europe in H115, following the recent decline in bond yields, the euro and the oil price and based on recent earnings trends. In turn, there is an increased likelihood of European equities outperforming US peers over H115, even if our medium-term concerns on Europe remain in place. Events in Greece show that political risks remain highly relevant. We maintain a cautious strategic positioning, but are warming to the energy sector and believe that in a negative interest rate environment gold will continue to find favour as a store of value. But the key question remains – what would happen to asset prices if investors lost confidence in the effectiveness of unconventional monetary policy?
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18/12/2014
Equity strategy and market outlook - December 2014
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In this month’s strategy piece, Alastair George believes that even as European equities return to their lows for 2014 there is no buying opportunity with valuations still substantially above long-run averages. In addition, high-quality government bond yields are now effectively pricing in the failure of central banks to achieve their inflation targets. For professional portfolio managers, holding cash can be an uncomfortable proposition. However, unless the US Federal Reserve is prepared to keep monetary policy looser than warranted by US domestic conditions to ward off potential external risks, continued global volatility is likely to lie ahead.
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28/11/2014
Equity strategy and market outlook - November 2014
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In this month’s strategy piece, Alastair George believes that investors have become increasingly reliant on central banks to drive asset prices as valuations have become stretched and corporate revenue growth has slowed during the post-2008 period, reflecting the sluggish performance of global GDP. For 2015, investors would already appear to be looking forward to further ECB action and we recognise this is likely to be supportive for equity markets in the short run. However, the valuation signals cannot be ignored; the possibility of central bank intervention is the only reason we are cautiously positioned rather than more negative. In Europe increasing political risk should be on investors’ agendas. In bonds, yields have declined sharply since the start of the year and are now at levels that are inconsistent with policymakers' objectives for inflation or growth. While bonds may still have some utility as a hedge against a significant economic slowdown, strong performance this year is likely to lead to only modest returns in most other scenarios.
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30/10/2014
Edison strategy and market outlook - October 2014
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In this month’s strategy piece, Alastair George believes that the so-called great rotation that was forecast to be the theme for 2014 has not happened, as sovereign bonds have outperformed equities year to date. We cannot ignore slowing economic momentum, high-profile profit warnings and slow aggregate corporate revenue growth and believe that global equities will continue to tread water while the fundamental outlook remains uncertain.
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25/09/2014
Equity strategy and market outlook - September 2014
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In this month’s strategy piece, Alastair George believes there are few reasons to change our cautious outlook for equities in the face of high valuations, slow global corporate revenue growth and tighter US monetary policy. For as long as the ECB continues to explore ways of loosening monetary policy further and the US Fed remains on a tightening track, the dollar is likely to face upward pressure against the euro. While the relatively highly valued nature of global equity markets may be a consensus view, investors should also keep in mind the sharp decline in forecast revenue growth rates, which is a global phenomenon. We believe portfolios should remain cautiously positioned and skewed to larger-cap equities with event or restructuring potential.
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01/09/2014
Equity strategy and market outlook - August 2014
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In this month’s strategy piece, Alastair George retains a cautious investment outlook. While central banks are in uncharted territory, having engaged in numerous experimental and extreme monetary policies in recent years, investors are under no compulsion to conduct similarly aggressive experiments with their portfolios. Global equity valuations remain above historical averages and we have seen no convincing reasoning for a permanently high plateau in market multiples. Within equities, we believe investors should continue to focus on large-cap and M&A-related investment ideas. Absent a significant crisis, the strong performance of government bonds year to date leaves less scope for upside and we would now be reducing overweight positions
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29/07/2014
Illumination: Equity strategy and market outlook
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In this month’s strategy piece, Alastair George believes that with global equity valuations either above or some distance above historical averages, it would be counterintuitive to be recommending overweight positions, given the lack of forecast growth in corporate revenues and profits. Within equities, we believe investors should focus on large-cap and M&A-focused investment ideas. Despite recent declines, mid-cap valuations have not fallen sufficiently to justify changing tack on this segment of the market. We are now cautious on corporate credit, with credit spreads as narrow as at any time in the last 15 years. In our view, UK and US government bond yields are close to the bottom of their fair value range, in the context of a likely peak in interest rates of 2.5-3% over this cycle.
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26/06/2014
Equity strategy and market outlook - June 2014
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In this month’s strategy piece, Alastair George believes that a cautious strategy has been the right call for H114 and sees no reason to adjust our view for H2. Gains in global equities have been modest year to date. The underperformance of mid-caps compared to large caps is also notable. US and UK equity market valuations remain relatively high and there has been little improvement in the growth outlook for profits. Our large-cap and M&A-focused investment strategy would have performed well so far this year. Despite recent declines, mid-cap valuations have not fallen sufficiently to justify changing tack. We are now cautious on corporate credit with credit spreads as narrow as at any time in the last 15 years, but view UK and US government bonds as fairly valued in the context of a likely peak in interest rates of only 2.5-3% during this cycle.
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29/05/2014
Equity strategy and market outlook - May 2014
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In this month's strategy piece, Alastair George notes that since Q412, global measures of asset class volatility have steadily fallen to levels not seen since 2007. This lowering of volatility has increased willingness by investors to seek out ever riskier securities to maintain returns in a global search for yield. However, a very traditional interest rate tightening cycle is clearly in view in the US and UK, which could easily be the trigger for a renormalisation of market volatility and risk premia. We continue to favour large cap equities over mid-caps and would also consider taking profits on corporate bonds as spreads have narrowed.
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30/04/2014
Equity strategy and market outlook - April 2014
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In this month's strategy piece, Alastair George's favourite asset class remains large-cap equities. A revival in M&A has driven large-cap outperformance in recent weeks by highlighting the latent value in this market segment. If, as we suspect, we are close to the top of the market cycle investors should consider tilting equity portfolios towards companies with M&A or restructuring potential to benefit from an increase in deal volumes. However, overall portfolio positioning remains cautious and we must also highlight a significant decline in forecast revenue growth post-2008 in the non-financial sector, which given current valuations at least some investors appear to be ignoring.
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27/03/2014
Equity strategy and market outlook - March 2014
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In this month's strategy piece, Alastair George believes a modest tightening in the monetary outlook, a richly valued equity market and the emergence of new risks keep us cautiously positioned. Our valuation models show forecast returns have dropped significantly in the last two years as improvements in fundamentals have failed to keep pace with rising equity prices. Events in the Ukraine are not yet systemic. We believe the increased risk premium for Russian assets is appropriate, but also see some medium-term benefits for the European defence sector.
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27/02/2014
Equity strategy and market outlook - February 2014
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In this month's strategy piece, Alastair George is still cautious and favouring large-cap equities. We believe investors have to look much harder for value at present. At this point in the cycle, investors should also consider emphasising securities whose return potential is highly company specific rather than reliant on macro factors. In bonds, highly rated government yields are now a little under our target of 3% and corporate credit spreads remain very tight in a historical context.
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30/01/2014
Equity strategy and market outlook - January 2014
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In this month's strategy piece, Alastair George believes the recent market declines are a gentle reminder that equity markets do not necessarily move in the same direction as economic momentum, especially when valuations are extended. If we have passed the point of 'peak' monetary accommodation, there is every possibility that equities have already entered a soft patch, and we note that the FTSE 100 has only moved sideways in the last eight months. In the face of even a gradual tightening of monetary conditions, the global re-rating of 2013 can only be sustained if the corporate sector can deliver profits upgrades to match the recovery in economic confidence.
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20/12/2013
Equity strategy and market outlook - December 2013
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In this month's strategy piece, Alastair George believes there has been a complete cycle in terms of investment strategy during the last two years. In 2011, equities discounted all but the worst scenarios for the eurozone, while highly rated government bonds at that time were offering negative real yields and were therefore expensive. During the last two years, the relative valuations of each asset class have turned 180 degrees and we believe portfolio managers should consider shifting allocations accordingly.
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29/11/2013
Equity strategy and market outlook - November 2013
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In this month's strategy piece, Alastair George believes that the urge to speculate can be strong in trending markets. Investors are prone to cloaking speculative behaviour in the language of investment, which can lead to big mistakes. We remain cautious on equities, but are warming to US and UK bonds, especially as they edge nearer yields of 3%, which would discount some of the technical effects of QE tapering. Real yields on bonds are now at levels consistent with the 2000-08 period and would offer diversification benefits in the event of a valuation-induced correction in equity markets.
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30/09/2013
Equity strategy and market outlook - September 2013
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In this month’s strategy piece, Alastair George believes the US Fed is clearly concerned that rising credit costs could choke US growth and therefore delay QE tapering. Slower growth and more QE are clearly beneficial to global bond markets. However, for global equities these factors are offsetting and there is no change to our cautious view on developed markets. Where to look for value? Our suggestion of adding emerging market exposure has quickly paid off and the gains may be less rapid from here. With little premium being paid for liquidity, we would focus on largest capitalisation companies that still trade at acceptable valuations in a historical context.
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02/09/2013
Equity strategy and market outlook - August 2013
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In this month’s strategy piece, Alastair George believes that in recent years a number of high-impact and widely discussed risks have failed to materialise. In response, judging by developed market equity valuations, investors now fear little. This is not the same as having little to fear. In our view, investors should now be taking a much closer look at the equally important investment risks of growth and valuation. Economic growth in developed markets remains weak in a historical context, and more importantly, both the US and UK equity markets look extended on traditional valuation parameters. By contrast, emerging market equities are now attractively valued based on dividend yields and compared to 10-year average earnings.
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29/07/2013
Equity strategy and market outlook - July 2013
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In this month’s strategy piece, Alastair George believes that a coordinated shift in emphasis from QE towards forward guidance by the US Federal Reserve, ECB and perhaps Bank of England marks a new phase in post-crisis monetary policy. Investors should position themselves for a shift to forward guidance from QE. While interest rates are very likely to remain low for the foreseeable future, the speculative element – in terms of further QE in both equity and credit markets - is likely to ebb. Equity valuations continue to march higher and we remain cautiously positioned in this asset class.
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01/07/2013
Equity strategy and market outlook - June 2013
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In this month’s strategy piece, Alastair George comments that world equity markets have only given back year-to-date gains so far and with profits forecasts still stagnant, we see little reason to get overexcited by current valuations. In credit, the recent increase in government bond yields, combined with widening credit spreads, leave corporate debt at significantly higher yields than a few months ago, and here we are more positive. Based on Japan’s experience and provided interest rates remain low, the US yield curve appears to have over-steepened in the short term.
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03/06/2013
Equity strategy and market outlook - May 2013
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In this month’s strategy, Alastair George believes the obvious hole in the portfolio for the long-only manager is the ultra-low yield from fixed income. Tempting as it may be to replace coupon income with dividend income by increasing exposure to quality equities, we believe valuations indicate this tactic may be at least partly played out. In our view, the better strategy in the current environment is to forego the modest pick-up in yield from ‘equity-for-debt substitution’ and stick with cash or near-cash until either bond yields rise to match the equity view of world growth, or equities fall to match the view of the bond market.
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29/04/2013
Equity strategy and market outlook - April 2013
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In this month’s strategy piece, Alastair George believes central bank policy has been attempting to re-light the private sector engine of economic growth while maintaining the same rate of climb. Now the initial boost from Q4’s QE is fading, global economic growth is once again close to stall speed. Across the globe economic data has undershot expectations – in the US, Europe, the UK and China. The common theme in earnings reports is the difficult economic environment and 12-month forward sales estimates for non-financials have stagnated since mid-2012 in every major global region. In contrast, equity markets have remained firmly bid despite mounting evidence of a slowdown. At the asset allocation level, we remain cautious (not bearish) on equities and have not changed our positive view on gold despite the recent correction.
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09/04/2013
Equity strategy and market outlook - March 2013
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In March’s strategy piece, Alastair George argues that investors should be cautiously positioned as a growth slowdown in the UK and Europe puts earnings estimates at increased risk. In addition, the impact of Cyprus may yet prove to be out of proportion to its actual size. Within a cautious overall equity outlook we continue to recommend quality companies with leading market positions, strong balance sheets and global exposures. An allocation to gold remains a valid hedge against future inflation and/or currency devaluation.
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27/02/2013
Equity strategy and market outlook - February 2013
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In this month’s strategy piece, Alastair George believes the risks are rising as economic and earnings forecasts fail to keep up with increases in equity markets. Even cautiously positioned portfolios would have delivered strong returns and he would still be looking to take profits on positions that have outperformed and particularly in mid-caps.
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20/12/2012
Equity strategy and market outlook - December 2012
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In this month’s strategy piece, Alastair George believes now is not the time to be positioning portfolios aggressively. Although markets have been rising on improving survey data, random short-term fluctuations in economic activity should not be confused with a return to structural growth, especially when the structural problems clearly remain in place. Fixed-income markets remain unattractive even if yields are likely to be held at low levels by central bank purchases. A diverse portfolio including cash, gold and high-quality equities is likely to yield more and provide better purchasing power protection over the medium term.
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30/11/2012
Equity strategy and market outlook - November 2012
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In this month’s strategy piece, Alastair George examines the evidence for a structural break in economic growth. Despite unconventional monetary policy and significant support from fiscal deficits, developed market growth post-2008 has disappointed. Although an uptick in recent survey data has created a bounce in the equity market, significant political challenges lie ahead in both Europe and the US. He believes investors should stay long cash and gold and blue-chip equities, while avoiding highly rated government bonds.
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26/10/2012
Equity strategy and market outlook - October 2012
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In this month’s strategy piece, Alastair George asks the question – is the eurozone crisis over? Both equity and credit markets are now at levels not seen since the start of the European sovereign debt crisis. Since highlighting the value opportunity in both January and May of this year, we continue to believe investors should consider carefully where they could be taking profits.
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01/10/2012
Equity strategy and market outlook - September 2012
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In this month’s strategy piece, Alastair George explains his view that flexibility to respond to events, which means having ample cash on hand, will prove beneficial to investors as there is a much higher degree of uncertainty in the economic outlook than usual. This is driven by the uncertain interaction of slowing economic activity and substantial additional monetary stimuli. While attractive in the medium term, European equity valuations are not nearly as compelling as they were in June and investors should continue to take profits.
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17/08/2012
Equity strategy and market outlook - August 2012
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This month, Alastair George outlines his belief that investors’ confidence has returned and it is time to take risk off. We feel the prospects for further monetary easing are now embedded in the price of equities. This leaves risks skewed to the downside if QE expectations fail to be matched by actual policy action or growth slows more than expected.
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25/07/2012
Equity strategy and market outlook - July 2012
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In this latest strategy, Alastair George outlines his belief that markets are efficiently discounting both declining economic growth prospects and the prospect of QE3 in the US. Sectors that are exposed to the periphery of Europe or commodity prices have underperformed. From a strategic perspective we continue to avoid the periphery of Europe, banks and basic resources. We favour equities over bonds and in particular dividend paying companies with quality franchises and balance sheets.
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21/06/2012
Equity strategy and market outlook - June 2012
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In this month’s edition, Alastair George notes the EU policy of subordination of private sector creditors is accelerating the capital flight from the periphery of Europe. Separately, policymakers have noted the slowdown in global economic activity and a drip-feed of monetary stimulus is likely to support markets in the short term. For the longer-term investor, the current gap between the dividend yield on UK equities and the gilt yield is almost the opposite of 2000. We believe the medium-term implied depreciation of equities is far too bearish given current valuations and continue to prefer quality, non-bank equities over bonds.
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28/05/2012
Equity strategy and market outlook - May 2012
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In this month’s strategy, Alastair George believes the pain of austerity is triggering political change and adding to uncertainty. Investors have not yet been given any clear opportunities to invest as higher-quality equities have proved resilient in the most recent market downturn. In the short term, markets are likely to remain balanced between weakening growth prospects and the likelihood of further monetary stimulus in the US and UK.
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24/04/2012
Equity strategy and market outlook - April 2012
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In this month’s strategy, Alastair George explains his view that capital flight in Spain is now too big to ignore and portfolio risk should be reduced. Recent European survey data has also disappointed. While the long-run case for European equities over bonds remains clear, increased volatility in the short term seems likely. Investors should reposition themselves so they can take advantage of market dislocations while the Spanish question is being resolved.
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29/03/2012
Equity strategy and market outlook - March 2012
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In this month’s strategy, Alastair George explains how he believes a US cyclical recovery is gaining strength while European equity valuations remain modest and profit margins robust. Investors should be careful to ensure balance in their outlook as bearish commentary has become over-represented in the financial media. He thinks it is too early to take profits in equities.
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27/02/2012
Equity strategy and market outlook - February 2012
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Strategist Alastair George believes we are seeing a cycle within a cycle. Investors tend to ignore structural issues when sentiment turns and the resulting equity market rally can be powerful. Alastair believes it is not yet time to take profits although the gains from here are likely to be slower. Investors should also consider positioning themselves to benefit from a pick-up in M&A.
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13/01/2012
Equity strategy and market outlook - January 2012
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In this month’s strategy piece, Alastair George explains that large-cap ROE is being supported by stimulative monetary and fiscal policies, which will continue through 2012. At present, because of the undeniable economic uncertainty, European markets are trading at attractive levels. But he cautions that highly rated sovereign bonds are trading at very low real yields in a historical context.
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03/11/2011
Equity strategy and market outlook - November 2011
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In this month’s strategy piece, Alastair George cautions that although equities have risen sharply, credit markets have not improved since the EU summit announcement. The call for a referendum in Greece has only added to uncertainty. Questions are also surfacing on the sustainability of China’s growth model. The risks have not gone away and investors should remain focused on quality names.
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06/10/2011
Equity strategy and market outlook - October 2011
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Alastair George, Edison’s strategist, continues to see unusual levels of value in defensive and quality names. China’s monetary tightening has led to a sharp slowdown in its money supply and global commodity prices have fallen sharply. Though unwelcome for commodity investors, lower prices will help western consumer confidence and leave more room to ease monetary policy – US inflation expectations are close to levels that triggered the announcement of QE2 in 2010.
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02/09/2011
Equity strategy and market outlook - September 2011
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Alastair George, Edison’s strategist, believes the probability of recession has risen substantially and has therefore reviewed S&P performance during the last 29 US recessions. Provided valuations are conservative at the start, equity market returns are close to long-run averages during recessions. Credit stress in the banking system will ultimately be resolved by policymakers even if the timing is uncertain. In the meantime, with European equities in particular trading at very low multiples of price/book the focus should be on adding to positions in quality industrial names, for those investors who can accept the short-term volatility.
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05/08/2011
Equity strategy and market outlook - August 2011
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Alastair George discusses the implications of developments in the ongoing sovereign debt crisis. Bond markets do not seem to be offering any compensation for the risks of an inflationary outbreak, which often follows a sovereign debt crisis. In contrast, UK and European equity markets are not expensive. With careful stock and sector selection, equity portfolios should offer much higher medium-term returns than bonds with a degree of inflation protection, for those investors who can accept the inevitable short-term risks.
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08/07/2011
Equity strategy and market outlook - July 2011
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In this month’s strategy piece, Mark Power reminds investors of the on-going government intervention in asset markets, notable this month with unexpected release of strategic oil reserves. Meanwhile purchasing managers indicate a continuing (albeit) slowing expansionary outlook notwithstanding the increase prevalence of profit warnings in the UK and Europe. In the UK, investors seem to be favouring healthcare and utility sectors in H111, a prudent strategy in our view.
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10/06/2011
Equity strategy and market outlook - June2011
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It seems counter-intuitive that the best performing indices YTD have been the Western bourses (led by the S&P). Even allowing for the natural disaster that befell Japan, the Shanghai index has taken two quite dramatic leg-downs in the last month. To some extent, China has been playing catch-up and, arguably (as we mentioned last month), the weakening dollar does distort the nominal gains in the S&P. Bill Miller of Legg Mason has pointed out some peculiarities with the S&P’s strength, which had its strongest first quarter since 1998. Only two of the S&P sectors (energy and industrials) outperformed the broader index in Q111, which last occurred in Q100 when the tech bubble was peaking. As Miller points out, this is not a healthy sign for the market.
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12/05/2011
Equity strategy and market outlook - May2011
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Global equity markets, with the notable exception of China, have by-and-large recovered from the shock of the Japanese disaster in March. This should not be interpreted as repercussions being limited – rather, that they are still unknown. We highlighted in passing last month that China, a key trading partner of Japan, would be unlikely to emerge unscathed from the latter’s inevitable growth slowdown. In recent weeks, inflation worries have re-emerged with a vengeance in China and resulted in another interest rate hike (the second in 2011), which led to -7% sell-off in the Shanghai index.
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11/04/2011
Equity strategy and market outlook - April 2011
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Despite a barrage of material developments across most regions, markets remain surprisingly resilient, indeed almost complacent. Inflation is the hot topic across all regions and is clearly having an impact on consumer actions, especially in the UK. Corporates, notably in the US, seem to be less affected, for now. We would encourage investors to reduce risk while they can and to favour businesses with strong balance sheets, franchises and the pricing power to withstand a prolonged consumer downturn.
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09/03/2011
Equity strategy and market outlook - March 2011
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While a market correction may or may not be in place, it seems to us that the key themes we outlined in February (governments printing money, inflationary pressures, and capital flight from bond markets) all hold true and will prove supportive to equity valuations in the medium term. We would not reduce equity exposure and, in fact, any sharp correction should be used to seek out high quality businesses. High-profile citations of inflationary pressure are now almost a daily occurrence in trading updates, and companies – particularly those without hedging in place or indeed pricing power – are feeling the effects fast. The speed of change is surprising to many: as a case in point, just three weeks after its interim trading statement in January, UK soft-drinks manufacturer Britvik last week raised its input cost inflation target from 5-6% to 9-11% (its share price falling 10% on the news). Meanwhile cocoa prices are up 25% since January and oil prices have risen 15%. Companies and investors need to be nimble to keep with such fast moving events.
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03/02/2011
Equity strategy and market outlook - February 2011
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While we anticipate increased volatility in the markets, we remain positive on equities in the medium term as long as governments continue to print money. In a world of conflicting economic indicators, the one safe bet is that confidence in governments is waning fast. For markets, this means likely outflows from government bonds and weakening currencies. Equities – being, as it were, the least ugly – would seem likely to benefit from this loss of faith. That is not to say that it will be an indiscriminate boost: a key theme of this issue is the risk of margin pressure from a surge in input prices. Equity investors will need to become more discriminate and seek out businesses with strong market positions and especially pricing power.
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11/01/2011
Equity strategy and market outlook - January 2011
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2010 was characterised by equities exhibiting profound swings both to the upside and downside as investor psychology appeared to overrule fundamentals. An assessment of the latter suggests the same familiar problems may affect the global economy in 2011, namely a lack of suitable policy instruments to manage the ongoing painful process of deleveraging across the developed world. Stagnating growth and rising inflation represent other concerns. These factors have somewhat masked a recent improvement in corporate earnings, but as fundamentals move back to dominate, there is a risk that these encouraging results patterns may not prove sustainable. Looking to the year ahead, we see no reason to change our current equity strategy, favouring diversified growth (basic materials) and high cash returns (telcos, utilities) principally at the expense of the consumer and financials sectors. Gold also remains highly attractive in our view.
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03/12/2010
Equity strategy and market outlook - December
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Events from the last month constitute a familiar pattern to the extent that equities continue to exhibit profound swings both to the upside and downside as investor psychology appears to be overruling fundamentals. A review of the latter suggests the same familiar problems beset the global economy, namely a lack of suitable policy instruments to manage the ongoing painful process of deleveraging across the developed world. Stagnating growth and rising inflation represent other concerns. These factors have somewhat masked a recent improvement in corporate earnings, but as fundamentals move back to dominate, there is a risk that these encouraging results patterns may not prove sustainable. Looking ahead to 2011 we consequently see no reason to change our current equity strategy, favouring diversified growth (basic materials) and high cash returns (telcos, utilities) principally at the expense of the consumer and financials sectors. Gold also remains highly attractive in our view.
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02/11/2010
Equity strategy and market outlook - November
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Stock markets edge higher, but we do not feel that recent gains will prove sustainable. In particular, we believe excessive faith has been placed in the potentially restorative powers attached to a further round of quantitative easing. Such a policy may not help correct underlying issues and could only serve to stoke already nascent inflation. The current Q3 reporting season may be as good as it gets in the near term; benefits from cost savings have mostly come through and future revenue growth (even with more QE) will become harder to detect. We also see relatively limited valuation support at present. Against this background, we retain our current equity strategy, favouring diversified growth (basic materials) and high cash returns (telcos, utilities) principally at the expense of the consumer sectors.
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04/10/2010
Equity strategy and market outlook - October
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Last month’s rally is encouraging for equity investors and may help restore some much needed optimism. However, it masks neither the fact that equities are only just (<5%) in positive territory year-to-date nor the fact that fundamentals remain highly challenging and indicators broadly inconsistent. We continue to believe that consensus expectations do not fully reflect a scenario of slowing growth for 2011 and that nascent inflation could undermine top-line prospects over coming months. Moreover, headline multiples of c 14x earnings for both the UK and US equity markets clearly do not constitute value territory. Against this background, we have become more defensive in our stock selection and prefer to play undervalued names with either strong global exposure or strong cash returns. Basic materials and telco score highly for us; consumer names least so.
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01/09/2010
Equity strategy and market outlook - September
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We expect global equity markets to remain under pressure through until the end of the year. Impending macro and micro data are likely to point to a further deterioration in momentum. Global GDP growth estimates are successively being downgraded and, for as long as both rising unemployment and inflation persist, we see risks to consensus earnings expectations particularly since we do not believe that a weaker outlook scenario is fully discounted in valuation levels. Against this background, we see few attractive options for equity investors (we continue to favour gold as an asset class). In the near term, with risk aversion levels rising, defensives look set to remain in vogue, and we can also construct a positive case for the financial sector. By contrast, we retain our cautious stance on consumer cyclicals. Longer-term, our preference is for stocks that offer high global diversification and undervalued growth potential.
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03/08/2010
Equity strategy and market outlook - August
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Recent gains in global markets are unlikely to prove sustainable in our view. Our fundamental concerns over the sustainability of nascent growth have not dissipated. Sovereign debt issues, inflation, unemployment and confidence trends all point to a slowdown in growth over the next 12 months, a scenario that we do not feel is fully discounted in consensus earnings expectations. With estimates potentially under pressure, it is also hard to find support in valuation levels, with the UK equity market trading on around 15x 2011 P/E. Against this background, we see few attractive options for equity investors (we continue to favour gold as an asset class). In the near term, we expect to see further positive momentum for financials and retain our cautious stance on consumer cyclicals; longer-term, our preference is for stocks that offer high global diversification and undervalued growth potential.
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01/07/2010
Equity strategy and market outlook - July
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There are few causes for optimism as we enter the second half of 2010. The downward pressures being exerted on global equities as a function of ongoing uncertainties appear unlikely to dissipate in the very near term and we believe volatility will continue to dominate markets over the summer. We still see a disturbing confluence of substantial state debt burdens, rising inflation, persistently high unemployment and stalling earnings momentum combined with limited valuation support. This leaves few obvious attractive options for equity investors (we continue to favour gold as an asset class) and our strategy for sector and stock allocation relates to adopting a longer-term focus, preferring positions that offer high global diversification and undervalued growth potential. Near term, high yielding plays are likely to find most favour. On the negative side, we retain our high conviction underweight in consumer cyclicals.
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01/06/2010
Equity strategy and market outlook - June
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Volatility and uncertainty have been the key themes for equity investors over the past month, and we see little reason for this to change over the summer. There remains an unappetising cocktail of substantial state debt burdens, rising inflation and growing unemployment. Added to this, earnings momentum is howing some signs of slowing and we do not see valuation levels for equities as being overly compelling. Our strategy for sector and stock allocation relates to adopting a longer-term focus, preferring positions that offer high global diversification and undervalued growth potential. Near-term, high yielding plays are likely to find most favour. On the negative side, we retain our high conviction underweight in consumer cyclicals.
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07/05/2010
Equity strategy and market outlook - May
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After reaching a 22-month high on 21 April, just four trading days later global equity markets experienced their biggest one-day falls since June 2009. Equities have remained highly volatile and under pressure since, and the All-Share now finds itself down 1.6% relative to 1 January. Such volatility is indicative of the challenges facing investors: macro data and earnings momentum are improving, but risks have far from dissipated and we remain concerned that much of the ‘better outlook’ scenario is already reflected in valuations. Against this background, we maintain our sector strategy and favour a bottom-up approach, preferring stocks with high global diversification that offer undervalued growth potential. From a UK perspective, we are overweight industrial cyclicals and underweight consumer cyclicals.
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07/04/2010
Equity strategy and market outlook - April
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Strong earnings momentum and increasing investor confidence have helped drive the UK stock market up 6.6% year-to-date with the FTSE currently standing at a 21-month high. We still have our concerns – primarily over the risks relating to debt levels, public sector spending cuts, unemployment and otentially slower economic growth – but at present, it is hard to disagree with the prevailing sentiment of optimistic opinion. Against this background, we have become more confident on the outlook for basic materials, industrials and the oil & gas sector, but also continue to favour keeping some exposure to more defensive sectors in the event of any pullback. Overall, we maintain a bottom-up approach, preferring stocks with high global diversification that offer undervalued growth potential.
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03/03/2010
Equity strategy and market outlook - March
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The cloud of uncertainty that hangs over both the UK and global economy as well as its stock markets refuses to dissipate. As we have written previously, the lack of direction in equities – which has played out for the first two months of the year – is indicative of our uncertainty thesis. Macro data points and road caution from many commentators suggest to us that risk aversion levels continue to rise and, against this background, we see little reason to change our sector allocation strategy. Within equities, we remain overweight utilities and telecoms, but can also find favour for basic materials. Meanwhile our core underweight positions are also unchanged, namely, in financials and consumer (goods and services).
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01/02/2010
Equity strategy and market outlook - February
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The tumultuous events of January serve only to reinforce our conviction in our thesis on equities: namely there is a strong case for adopting increasingly defensive portfolio strategies. Risk aversion is replacing risk appetite and the list of potential uncertainties about the outlook – namely global GDP trends, banking sector regulation and reform, earnings momentum and visibility and the health of the consumer – continues to rise. Against this background, we reiterate our view on sector allocation: overweight utilities and telecoms (based on their defensive characteristics), and also basic materials (we remain mostly confident about global demand trends and the sector appears cheap); underweight financials and consumer names (risks rising in both sectors).
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11/01/2010
Equity strategy and market outlook - January
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In summary, we expect stock picking to come back to the fore in 2010 and against this background favour high-quality growth stocks on modest valuations, especially those with diversified global exposure. From a sectoral perspective, we advocate moving to more overweight positions in defensive sectors such as telecoms and utilities, particularly given early cyclicals appear to have run their course and risks will likely rise as the year progresses. We believe it is still defensible to retain an overweight position in basic materials given global growth prospects. On the negative side, we have structural and valuation concerns over the financials and consumer (goods and services) sectors.