Moving more defensive
While equity valuations are between fair to expensive, the asset class remains in an uptrend but surrounded by negative sentiment, which we view favourably as a contrarian signal. It is important to remember we are in the ‘slowdown’ phase of the current business cycle, where global growth is still positive.
UK1. The market continues to underperform its peers, despite the boost to competitiveness from sterling weakness, which translates into higher foreign earnings for the globally oriented large caps. With an uncertain Brexit outcome and weak profit growth, many are overlooking attractive valuations, historically high dividends and a large-cap index largely insulated from domestic geopolitics. We are Overweight.
US. GDP tracking estimates suggest Q3 growth will be close to 2%, bolstered by services and consumer spending. Wage growth above inflation is positive for household incomes but negative for corporate margins where we expect a modest contraction. Sales growth has slowed for US companies to low single digits as manufacturing confidence has tumbled. As a result, profit growth should be negligible this year and in mid-single digits next. We are Neutral.
Japan. Tokyo is generally viewed as a cyclical, export-sensitive market, making outperformance difficult to achieve in times of industrial slowdown and trade wars. Moreover, the yen trades on safe-haven flows from global investors, a negative for exporters. Moreover, the impact of October’s VAT hike may well subdue consumption more than expected. Nonetheless, valuations are attractive for Japanese equities – the dividend yield is above 2%, well above the long-term average of 1.7% – and the safe-haven yen allows some diversification benefits for international investors in either pure equities or a multi-asset portfolios. On balance, we are Neutral.
Eurozone. The euro zone is particularly sensitive to the trade war and weakness in manufacturing output given its sizeable industrial base and high dependency on exports (which represent 47% of German GDP for example). For now, risks such as “no-deal” Brexit or an EU-Italy budget dispute appear to have faded, but they will remain in the background. Earnings growth is likely to be barely positive this year, although valuations are supportive. We are Neutral.
Emerging Markets. Emerging market equities have underperformed year-to-date. As the trade war bites, analysts have revised earnings growth expectations lower to low single digits. China has continued to ease policy but the impact is not yet visible in data, especially in manufacturing. Moreover, valuations still look demanding – the price-to-earnings ratio is almost 20% over its 10-year median. All of this argues for maintaining an Underweight stance.
Momentum remains strong, but profit growth should be negligible this year and in mid-single digits next. We are Neutral.
Valuations are supportive, but earnings growth is likely to be barely positive this year. We are Neutral.
With an uncertain Brexit outcome and weak profit growth, many are overlooking attractive valuations, historically high dividends and a large-cap index largely insulated from domestic geopolitics. We are Overweight.
Valuations are below their 10-year median. The impact of a strengthening Yen on exports suggests caution is warranted.
Emerging market equities have underperformed as slowdown and trade war worries have raged. Moreover, earnings growth have been revised down. We are Underweight.
Source: Kleinwort Hambros 04/10/2019
*Duration: short = Up to 5 years, medium = 5-7 years, long = 7+ years
1. Our generic “Overweight” to UK Equity may not necessarily be reflected in all strategies; for example, in UK-biased strategies where there may be tactical reasons to be underweight the strategic benchmark UK Equity allocation.
Past performance should not be seen as an indication of future performance. Investments may be subject to market fluctuations, and the price and value of investments and the income derived from them can go down as well as up. Your capital may be at risk and you may not get back the amount you invest.