This month:
Expert investment views:
The UK equity market is highlighted for remaining very cheap relative to the global benchmark
A case is made for the Japanese yen having the ability to appreciate far, far above reasonable value due to a reversal in the ‘carry trade’
Investors are advised to not to panic about volatility and to keep their eyes on the horizon, rather than the rolling waves below
Featuring this month’s experts:
1. The UK equity market – where do we go from here?
Insights from:
The UK equity market is very internationally exposed, with an estimated three quarters of revenues of FTSE 100 constituents coming from outside the UK. As such, the UK equity market tends to be driven more by international rather than UK specific economic developments. The UK has high weightings in commodity-orientated sectors, namely miners and energy. It also has relatively high weightings in defensive sectors (health care and consumer staples), and for a developed world market, it also has high weightings in financials. If conditions are in place for these sectors to outperform on a global level, that bodes well for the performance of UK equities versus the global equity benchmark.
While the domestic economic outlook might be less important for UK equity relative performance, it still matters. On that front, we suspect Labour will have some success in boosting economic growth with policies that require a limited fiscal outlay. However, the pathway to success is not guaranteed, and implementation will need careful navigation.
That low valuation stems largely from the fact that the UK has high weights in low-valued equity sectors. But even on a ‘sector neutral’ basis, the UK valuation discount, while not as large, is still present
Turning to valuation, even after recent outperformance, the UK equity market remains very cheap relative to the global benchmark. That low valuation stems largely from the fact that the UK has high weights in low-valued equity sectors. But even on a ‘sector neutral’ basis, the UK valuation discount, while not as large, is still present.
We maintain a modest preference for the growth-orientated U.S. equity market, in part because it has higher exposure to the companies set to benefit from strong artificial intelligence spending. However, we have warmed up to the UK equity market in recent months. Its sector make-up offers key diversification benefits at a time when we moderately favour the U.S.
Paul Danis
Head of Asset Allocation at RBC Brewin Dolphin
2. The yen also rises
Insights from:
For a long while, the Japanese enjoyed, rather than endured, the fall in their currency. But they don’t like the inflation it brings, nor the excess of tourists. The newspapers proclaim in banner headlines the yen-dollar rate: ‘what a fine mess you’ve got us into here’ is the moan at government inaction.
The key to the investment opportunity in anticipating a stronger yen is that there are two groups of investors short of it who appear not to have perceived the embedded risk to their assets. One is Japanese institutional investors, long of US and European government bonds, who hold them in dollars and euros. The other is non-Japanese borrowers in yen, yen which is sold to fund the carry trade.
The key to the investment opportunity in anticipating a stronger yen is that there are two groups of investors short of it who appear not to have perceived the embedded risk to their assets
So, when the yen strengthens, as it has this month, there will be a big number of forced buyers of the currency. In investment terms, that means the yen can appreciate far, far above reasonable value. Finger in air, it might move by exactly double that – the overshoot being the same as the previous undershoot.
Jonathan Ruffer
Chairman, Ruffer LLP
Top Tip
Lee Goggin
Co-Founder
3. How to survive market volatility
Insights from:
Share markets around the world have sold off sharply. The immediate trigger was weaker than anticipated US jobs data that sparked concerns over the possibility of a recession in the world’s largest economy. Other data has been disappointing too. There are worries manufacturing is weakening and that US consumers are about to hit the spending buffers because they have exhausted their post-Covid build-up of savings.
With the US labour market’s slowdown becoming clearer, expectations increased the US Federal Reserve might cut interest rates more aggressively, putting pressure on the US dollar. Simultaneously, the Bank of Japan raised rates to control inflation, buoying the yen, which has led to a reversal in the so-called ‘carry trade’ of borrowing cheap yen to invest elsewhere. When this happens traders must quickly sell assets to cover currency losses, which causes ripples across all markets.
In a cascade effect of investors having to sell down positions it’s often the ‘crowded trades’ and previously top performing areas that bear the brunt of falling prices. It’s no surprise to see tech stocks, which many have said were previously ‘priced for perfection’ at the heart of the volatility, alongside speculations such as crypto assets. Those leaning too far on one side of the boat and taking a less-diversified approach have been punished, at least in the short term.
It’s worth noting too that thinner summer trading that can lead to additional volatility around economic news, so although daily price moves can appear scary, this is normal in the context of stock markets and it’s important not to react with haste
With huge media attention and minute-by-minute commentary it’s easy to be rattled, but it’s important to keep a clear head. It’s worth noting too that thinner summer trading that can lead to additional volatility around economic news, so although daily price moves can appear scary, this is normal in the context of stock markets and it’s important not to react with haste.
At these times it is usually best to keep calm, stick to your investing plan and keep focused on the fact that sharp short-term moves should pale into insignificance over multiple years and decades. It’s rather like avoiding sea sickness by keeping your eyes on the horizon rather than the rolling waves below. Although there could be further volatility ahead the destination is what matters rather than the journey, even though it can be stomach churning at times. For what it’s worth we believe a ‘soft landing’ scenario whereby the US avoids recession is still very possible, which may be supported by other data as it emerges in the coming weeks and months.
Rob Morgan
Chief Analyst at Charles Stanley
Important information
The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment and financial planning decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.
