Looking ahead

UK – On 30 October, the chancellor of the Exchequer, Rachel Reeves will deliver her first Autumn Budget.  This is possibly the most debated budget of recent times, with lots of speculation being made about what could happen.   If Labour’s manifesto pledges are to be maintained, changes to income tax, national insurance, VAT and corporation tax should be off the table.  Whilst we prefer not to predict what could happen, improving confidence feels like a key first step in delivering growth.  We are hopeful that the budget will be able to achieve its goal of filling the £22bn ‘black hole’ with minimal change or disruption so we can put the event behind us and move on.  

Overall we are positive on UK Equities. In relative terms, the UK market still remains cheap versus its international peers, and we are currently witnessing a rise in the acquisition of UK companies because of this. UK companies have traditionally been thought of as good dividend payers, with the FTSE All-Share averaging a dividend yield of 4% over the last 10 years.  More recently share buybacks in UK companies have also picked up.  This suggests that UK companies also view their own shares as too cheap.  The UK buyback yields now exceed those in the US market, with the FTSE All-Share offering a current cash yield of close to 6%.  This shift in corporate activity should provide further support to UK valuations.  If the Government is successful in improving sentiment towards the UK, UK equities could perform favourably in the years ahead.

US – The US election is nearly upon us and the two candidates appear to be neck and neck.  Although Trump appears to be winning the polls in the majority of the swing states, the results are currently within the historic margin of error so should not be relied upon.  Each candidate’s economic policies will have their own consequences, however, the balance of power is also dependent on which party wins a majority in both the Senate and the House of Representatives.  There are however some similarities both candidates share.  For example, both candidates are talking tough on trade and immigration, and both are expected to continue to spend more money than they receive in tax receipts which could keep Treasury yields elevated. Positioning for any particular outcome in the election is ineffective and history shows that the winning candidate or party has had little bearing on future market returns.

The performance of the market largely depends on the likelihood of a soft-landing being achieved.  Focus it seems, has now shifted from fears of persistent inflation to fears of softer growth. If a recession is avoided in the US, equities could still offer more upside.  Equities generally perform well when the Fed eases, providing a recession can be avoided.  If we strip out the top 10 companies in the S&P500, the valuation of US Equities remaining 490 companies look more reasonable and US smaller companies even more so. Overall, corporate profits improved in the second quarter and earnings growth estimates for the third quarter are optimistic the resilience will continue.

Eurozone –The cost-of-living shock is fading in Europe and the economy is entering a more favourable economic environment with the ECB continuing to cut interest rates.  It seems that growth is slowly beginning to pick up, even though Germany continues to contract. As real wages and consumer confidence rise, a slow and steady recovery could be underway. Eurozone stocks are attractively valued, and they should perform well if earnings begin to recover with the economy.  Furthermore, a recovery in China should help the eventual recovery in German manufacturing.

China – A lot has been made of China’s recent stimulus package, however, very little detail has been disclosed about any fiscal support measures. This year’s 5% GDP target seems like a stretch at the moment and more stimulus could be needed to achieve it. The influx of capital from overseas investors since the recent stimulus announcement set a new record, and although this has now cooled, we could see this pick up again should more stimulus measures be released. Chinese stocks are still cheap on a relative basis and sentiment from international investors seems to be shifting towards the region. 

Conclusion

The third quarter of 2024 has been favourable for investors who have enjoyed positive momentum across equity markets. As we move into quarter four, we expect to see some market volatility around the US election, however, we should be reminded that short term volatility is both normal and healthy in equity markets and can provide our fund managers the opportunity to increase exposure to stocks where they have high conviction. Whilst the headlines will certainly create a lot of noise, they should not derail the longer-term financial plans of investors.

At the moment, the trajectory of economic data is encouraging.  With interest rates reducing across the developed world (with the exception of Japan), we are hopeful that economies continue to recover.  Economic recovery should translate into corporate earnings which should support equity prices.  The Fed and other central banks still need to carefully consider their decisions, so economies do not run too hot or too cold and the risks of policy mistakes remain.

Whilst we are hopeful that economies continue to improve, we are also mindful that things don’t always go to plan.  To help protect portfolios, we diversify assets to include equities in regions that are more fairly priced and also areas of the market offering more defensive properties.  Our allocation to fixed interest now pay a very attractive yield and should add ballast to portfolios should there be any correction in equities.