US equities have lagged again over the quarter as the sector makeup of the market was less favorable. Heavy weightings to technology weighed on index returns as investors looked for companies that would perform better in a higher growth environment.
In a reversal of a trend, the dollar has strengthened, providing a tailwind to the domestic equity market. Most are expecting that the weakening trend will continue, reasserting a headwind and making relative performance more difficult for this very domestically focused market.
We maintain a slight underweight positioning to US equities, reflecting their high valuations relative to the global equity market and that they will not benefit as much from a resurgent global economy, given the sector makeup.
After a very strong Q4 2020, Uk equities have held their own against global equities, posting a small outperformance YTD. UK Equities continue to be helped by the rotation into value, the appreciation of the Sterling and the lifting of negative UK sentiment both from Brexit and the rapidly improving relative performance in fighting the COVID pandemic. All of these are likely to persist over the coming months.
Once again, despite a strong quarter, the UK continues to be one of the cheapest markets and remains good value on an absolute basis.
We have continued with our long-term process of reducing portfolio bias towards UK equities. This is not reflective of our shorter-term outlook for the asset class but rather to ensure that portfolios are not unnecessarily exposed to specific areas. While there is a strategic long-term reduction in the UK equity allocation, we have maintained a slight tactical overweight, increasing this within the lowest risk portfolios.
European equities have underperformed global peers over the quarter as investors have shunned the market. The European deployment of the COVID vaccines has lagged other developed markets and there is now the third wave of infections taking hold in the major EU economies, leading to greater restrictions. The prospect for resurgent economic growth from the bloc in the near term is therefore unlikely.
The increasing pessimism towards European equities contrasts with other markets and potentially sets up the region for a period of relative outperformance once the current issues are resolved.
We have a slight underweight to Europe, which reflects the above although the reduction to this relative positioning at the ICM is an acknowledgment that sentiment towards the region may be near a trough.