Following last weeks’ Macro IDB, this week we are focusing on equities, specifically current valuations and considering - What is priced into markets? We also introduce our new theme: ‘UK equity income’.
Global economic momentum remains solid and growth projections have been revised higher. Stock markets have gone some way to pricing in good economic news but stretched valuations suggest we are nearing the end of the stock market cycle. At this point valuations are vulnerable to forecasting error.
2018 Corporate earnings expectations have moved higher, but it is difficult to determine whether this is due to momentum or over optimism. Sentiment indicators suggest investor confidence is at its highest point since the late 1990s.
Analysis suggests the impact of US corporate tax reforms is largely priced into equities, together with stronger GDP growth and high margins. Ongoing recovery in Europe and potentially stronger consumption in the US on the back of private tax cuts, could provide additional new momentum to markets and is arguably not yet reflected in stock prices.
There are two schools of thought on how to approach the strong momentum, exuberance and elevated valuations evident in markets; adopt the mind-set of a trader or an investor. London & Capital takes a blended approach by tapering risks as markets move higher, whilst being prepared to take decisive action when there is confirmation of changing market dynamics.
Within the UK Equities market there are currently challenges. For example, the current strength of Sterling versus the US Dollar, challenges in the domestic economy where household consumption is under pressure and the economy is slowing. There is also the continuing political uncertainty surrounding Brexit.
However, the UK equities market can provide significant dividend yields through careful selection of individual names. We have recently released an equity theme to take advantage of this income opportunity – UK Equity Income. The theme focuses on UK Sterling earners across all industry sectors, at the same time as maintaining an emphasis on quality franchises.