Global equities look very attractive.

17th May 2013

Ian Copelin, Investment Director, my wealth, comments “Global equity markets have started 2013 very strongly and created plenty of excitement amongst investors that the long-anticipated wall of money into equities is on its way.

Although, one strong quarter for performance doesn’t make a summer, I am optimistic on the outlook for global equities.

While prospects for global growth look anaemic, especially in the UK (don’t worry:  the relationship between annual equity returns and economic growth is very tenuous), many of the factors which have been plaguing and politicising market sentiment over recent years are now finally being addressed.

The most obvious was the Eurozone debt crisis:  the European Central Bank’s pledge to do whatever it takes to preserve the euro coupled with its unlimited bond buying programme has removed much of the risk of contagion that threaten economic instability.

China was also on investors worry list:  uncertainty relating to the change in leadership and fears over a ‘hard-landing’ (China’s economic growth was slowing so quickly that many economists forecast a Chinese recession, just like the thud you get from an aeroplane when the descent is too fast and too sharp compared to a normal ‘soft-landing’ – when economic growth is slowed but not tipped into a recession).  However, economic data from China continues to show improvements fuelling optimism the world’s second-largest economy is stabilising (a soft-landing).  The Chinese economy could see growth reaccelerate in 2013 – helped by domestic consumption growth due to the growing middle-class.  An improving economic picture in China should also help Asian & Emerging Market equities perform better in 2013, as the aversion to the perceived riskier parts of the equity universe in 2012 resulted in emerging market valuations falling to particularly attractive levels.

Elsewhere, in the US, the deal to avert the fiscal cliff and the automatic introduction of tax increases and spending cuts (which would have pushed the US back into recession) is obviously positive news, as is the continuation of the recovery in the housing market and employment market.  House price appreciation and lower unemployment should lead to increased consumer confidence and spending (the consumer accounts for around 70% of US GDP).  In addition, the US is experiencing a manufacturing renaissance as the development of shale gas technology has led to a dramatic fall in US natural gas prices which is effectively giving the entire US economy a huge energy subsidy and a large competitive advantage.

Although there may be a few scares along the way (growing geo-political tension with North Korea; Iran; and Japan/China are three that currently keep me awake at night), equity valuations are still not demanding despite the first quarter rally.  This coupled with the low expectations for corporate profitability growth suggest the risks are on the upside as any good news should have a positive impact on the market.”