Global equities were broadly unchanged last week, edging up in local currency terms and falling slightly in sterling terms. Nonetheless, US equities did make some headlines as the S&P 500, the pre-eminent US equity index, is now up 20% from its low last October. A 20% gain is often touted as the traditional marker of a bull market.
But it is a little early to get the champagne out. The rally has been concentrated in a handful of mega cap technology stocks and the recovery seen in the rest of the US market has been much smaller. Furthermore, as we highlighted last week, the major uncertainties facing investors have yet really to be resolved one way or the other. Chief amongst these is whether or not the US will end up in recession.
The other point is that the recovery in US stocks, at least as far as UK investors are concerned, has been considerably smaller because of the recovery in the pound from its low at the time of the infamous mini-budget. US equities have returned only 6.9% in sterling terms since their low in October, less than the 14.2% gain managed by UK stocks.
The recovery in US equities looks rather overdone to us and we believe other regions have significantly more upside going forward.
Asia and emerging markets continue to look well placed. Critically, the Asian economies led by China are picking up speed – even if not quite as fast as had been hoped – whereas growth is set to slow further in the West. Valuations are also cheap, unlike in the US. These regions trade on a 12-month forward price/earnings ratio of 12-13x versus 19x in the US.
The argument for the UK is based solely on its cheapness. Its P/E ratio is only 10.3x, which is both 25% cheaper than its average over the past 30 years and 35% lower than the rest of the world. Valuations may be a poor guide to short-term market moves but are a good indicator of long-term return potential.
Finally, there is Japan which has had a good run recently and is looking more attractive. Valuations are also supportive here. But more importantly, the scourge of deflation may finally have been vanquished and Japanese companies, encouraged by the government, at long last seem to be putting more emphasis on delivering value to their shareholders.
Returning to the here and now, central banks will very much be the focus over the coming week. The US Fed meets on Wednesday and is widely expected to leave rates on hold – barring any nasty surprise from the inflation numbers on Tuesday. However, this is viewed as just a pause for the Fed to take stock of the latest economic data and a final 0.25% hike is anticipated in July.
Meanwhile, the ECB is forecast to raise rates by 0.25% on Thursday and to follow it up with another such increase in July. Inflation remains way above its comfort level and should outweigh any concerns over growth – even though the latest numbers now show the Eurozone falling into a technical recession over the winter, with GDP contracting 0.1% in both the last two quarters.
This just leaves the BOE. It meets next week and looks certain to raise rates by another 0.25%, with a further couple of hikes likely to follow over subsequent months. The recent ratcheting up of rate expectations has fed through to mortgages and much of the pain from higher rates has still to be felt on the housing market.
Still, the surprise if anything so far has been how resilient house prices have been. The Nationwide index shows prices down only 2.5% from their peak last summer and the Halifax index 4.3% lower. To put this in perspective, according to both indices, this still leaves prices up 20% or so on their levels at the start of 2020.
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