UK Equities have underperformed developed market peers as they were hit with higher no deal Brexit fears as well as emerging market concerns, to which the UK equity market is overly exposed.
Valuations in the UK equity market remain very compelling, trading at a significant discount to most other markets, expanding their discount over the quarter. While some of this is justified given the unique risks facing the UK, on a medium to long term view this appears to be a significant buying opportunity.
Sterling has been a big mover in the quarter following the election of Boris Johnson to Conservative Party leader and subsequent hardening of the government’s stance to a no-deal. As market participants have increased their expectations of a no-deal, the pound has fallen. This has increased the attractiveness of those assets that have foreign currency exposure, either through global operations or through exports.
Below we’ve included the latest Asda Income Tracker. It shows that there has been a continued improvement in the level of household disposable income. Wage growth has continued, and inflation has stayed moderated, falling to 1.7% in August. The tightness of the labour market looks set to continue. Not only is the unemployment rate at cyclical lows the makeup of employment has improved significantly over the last year, with an increase in full-time employment. This inherently reduces the slack in the system. Nevertheless, the ultimate outcome of Brexit may send the dynamics of the labour market in either direction.
US equities have continued to perform well but not wholly out of line with international peers. As previously, it appears that US equities are subject to a greater degree of volatility when there are market rotations/ selloffs/ rallies, especially on an intraday basis.
On a valuation basis, the US market as a whole remains relatively more expensive than global peers. The outlook for earnings growth continues to be muted as investors’ fears of an economic slowdown has dampened earnings expectations.
The presidential elections are now coming over the horizon and may increasingly impact markets, and certainly increase volatility. Historically, areas such as biotechnology have been impacted, as high drug prices are an easy win for politicians. Much will depend on who wins the Democratic nomination.