In this week’s film, Alistair Jex, Senior Portfolio Manager, Coutts, analyses the impact of Theresa May’s speeches on markets and discusses how we find value in expensive asset classes.
Our key messages this week are:
Price pressures building
It was a busy week in the markets as they digested the UK Prime Minister’s speeches on the government plans for Brexit, and readied themselves for the first 100 days of the Donald Trump presidency.
There was a raft of important economic data too, the majority of which pointed to inflationary pressures building in the US, strong labour markets in the UK, and improving economic conditions in Europe. At its monthly meeting, the European Central Bank continued with a 0% refinancing rate in an attempt to re-inflate the European economy through monetary easing.
So it is fair to say the big numbers of last week point to an upward trend in growth and prices in the US, Europe – especially German inflation, and the UK.
No ‘soft’ option for Brexit
We have waited a long time for details on the UK’s plans to leave the EU and last week came two key speeches from the Prime Minister.
Addressing the UK’s media, Teresa May said the UK would not seek continued single market membership, and emphasised the potential for multiple trade deals. Later in the week, at Davos, she said the UK “would step up to a new leadership role” in the global economy once it leaves the EU.
Overall the tone appeared less aggressive, against expectations, and the markets reacted positively to this – especially sterling versus the US dollar.
Looking through this however there seems nothing substantially new: The UK still plans to leave the single market and customs union and sign its own trade agreements, as well as control immigration. We think this is not a soft Brexit approach.
We believe that the political event risk still remains for sterling, despite a brief rally, while the long-term valuation remains supportive.
Looking for value in an expensive asset class
The current economic climate remains favourable for risk assets, especially equities versus poor-returning government bonds. Generally, with more flows into equities, valuations have risen. So where can we find value in equity markets at the moment?
We continue to see relative value opportunities in the likes of European Equities. The Eurostoxx 50 is trading at a forward price/earnings of 13x, compared to 15.6x for the S&P 500. We also see superior earnings growth potential for European companies.
Sentiment is also on the rise in the region, based on stronger manufacturing data in Italy and rising business confidence in Germany.
Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.
Portfolio Manager, Coutts UK
Alistair joined Coutts in 1998 and is responsible for running high net worth portfolios, including advisory solutions, and in addition leads a broad team of Portfolio Managers. He is a Chartered Financial Analyst and a Fellow of the Securities Institute.