13/01/2012 Equity strategy and market outlook - January 2012 Download:Log in to access report
In this month’s strategy piece, Alastair George explains that large-cap ROE is being supported by stimulative monetary and fiscal policies, which will continue through 2012. At present, because of the undeniable economic uncertainty, European markets are trading at attractive levels. But he cautions that highly rated sovereign bonds are trading at very low real yields in a historical context.
03/11/2011 Equity strategy and market outlook - November 2011 Download:Log in to access report
In this month’s strategy piece, Alastair George cautions that although equities have risen sharply, credit markets have not improved since the EU summit announcement. The call for a referendum in Greece has only added to uncertainty. Questions are also surfacing on the sustainability of China’s growth model. The risks have not gone away and investors should remain focused on quality names.
06/10/2011 Equity strategy and market outlook - October 2011 Download:Log in to access report
Alastair George, Edison’s strategist, continues to see unusual levels of value in defensive and quality names. China’s monetary tightening has led to a sharp slowdown in its money supply and global commodity prices have fallen sharply. Though unwelcome for commodity investors, lower prices will help western consumer confidence and leave more room to ease monetary policy – US inflation expectations are close to levels that triggered the announcement of QE2 in 2010.
02/09/2011 Equity strategy and market outlook - September 2011 Download:Log in to access report
Alastair George, Edison’s strategist, believes the probability of recession has risen substantially and has therefore reviewed S&P performance during the last 29 US recessions. Provided valuations are conservative at the start, equity market returns are close to long-run averages during recessions. Credit stress in the banking system will ultimately be resolved by policymakers even if the timing is uncertain. In the meantime, with European equities in particular trading at very low multiples of price/book the focus should be on adding to positions in quality industrial names, for those investors who can accept the short-term volatility.
05/08/2011 Equity strategy and market outlook - August 2011 Download:Log in to access report
Alastair George discusses the implications of developments in the ongoing sovereign debt crisis. Bond markets do not seem to be offering any compensation for the risks of an inflationary outbreak, which often follows a sovereign debt crisis. In contrast, UK and European equity markets are not expensive. With careful stock and sector selection, equity portfolios should offer much higher medium-term returns than bonds with a degree of inflation protection, for those investors who can accept the inevitable short-term risks.
08/07/2011 Equity strategy and market outlook - July 2011 Download:Log in to access report
In this month’s strategy piece, Mark Power reminds investors of the on-going government intervention in asset markets, notable this month with unexpected release of strategic oil reserves. Meanwhile purchasing managers indicate a continuing (albeit) slowing expansionary outlook notwithstanding the increase prevalence of profit warnings in the UK and Europe. In the UK, investors seem to be favouring healthcare and utility sectors in H111, a prudent strategy in our view.
10/06/2011 Equity strategy and market outlook - June2011 Download:Log in to access report
It seems counter-intuitive that the best performing indices YTD have been the Western bourses (led by the S&P). Even allowing for the natural disaster that befell Japan, the Shanghai index has taken two quite dramatic leg-downs in the last month. To some extent, China has been playing catch-up and, arguably (as we mentioned last month), the weakening dollar does distort the nominal gains in the S&P.
Bill Miller of Legg Mason has pointed out some peculiarities with the S&P’s strength, which had its strongest first quarter since 1998. Only two of the S&P sectors (energy and industrials) outperformed the broader index in Q111, which last occurred in Q100 when the tech bubble was peaking. As Miller points out, this is not a healthy sign for the market.
12/05/2011 Equity strategy and market outlook - May2011 Download:Log in to access report
Global equity markets, with the notable exception of China, have by-and-large recovered from the shock of the Japanese disaster in March. This should not be interpreted as repercussions being limited – rather, that they are still unknown. We highlighted in passing last month that China, a key trading partner of Japan, would be unlikely to emerge unscathed from the latter’s inevitable growth slowdown. In recent weeks, inflation worries have re-emerged with a vengeance in China and resulted in another interest rate hike (the second in 2011), which led to -7% sell-off in the Shanghai index.
11/04/2011 Equity strategy and market outlook - April 2011 Download:Log in to access report
Despite a barrage of material developments across most regions, markets remain surprisingly resilient, indeed almost complacent. Inflation is the hot topic across all regions and is clearly having an impact on consumer actions, especially in the UK. Corporates, notably in the US, seem to be less affected, for now. We would encourage investors to reduce risk while they can and to favour businesses with strong balance sheets, franchises and the pricing power to withstand a prolonged consumer downturn.
09/03/2011 Equity strategy and market outlook - March 2011 Download:Log in to access report
While a market correction may or may not be in place, it seems to us that the key themes we outlined in February (governments printing money, inflationary pressures, and capital flight from bond markets) all hold true and will prove supportive to equity valuations in the medium term. We would not reduce equity exposure and, in fact, any sharp correction should be used to seek out high quality businesses.
High-profile citations of inflationary pressure are now almost a daily occurrence in trading updates, and companies – particularly those without hedging in place or indeed pricing power – are feeling the effects fast. The speed of change is surprising to many: as a case in point, just three weeks after its interim trading statement in January, UK soft-drinks manufacturer Britvik last week raised its input cost inflation target from 5-6% to 9-11% (its share price falling 10% on the news). Meanwhile cocoa prices are up 25% since January and oil prices have risen 15%. Companies and investors need to be nimble to keep with such fast moving events.
03/02/2011 Equity strategy and market outlook - February 2011 Download:Log in to access report
While we anticipate increased volatility in the markets, we remain positive on equities in the medium term as long as governments continue to print money. In a world of conflicting economic indicators, the one safe bet is that confidence in governments is waning fast. For markets, this means likely outflows from government bonds and weakening currencies. Equities – being, as it were, the least ugly – would seem likely to benefit from this loss of faith. That is not to say that it will be an indiscriminate boost: a key theme of this issue is the risk of margin pressure from a surge in input prices. Equity investors will need to become more discriminate and seek out businesses with strong market positions and especially pricing power.
11/01/2011 Equity strategy and market outlook - January 2011 Download:Log in to access report
2010 was characterised by equities exhibiting profound swings both to the upside and downside as investor psychology appeared to overrule fundamentals. An assessment of the latter suggests the same familiar problems may affect the global economy in 2011, namely a lack of suitable policy instruments to manage the ongoing painful process of deleveraging across the developed world. Stagnating growth and rising inflation represent other concerns. These factors have somewhat masked a recent improvement in corporate earnings, but as fundamentals move back to dominate, there is a risk that these encouraging results patterns may not prove sustainable. Looking to the year ahead, we see no reason to change our current equity strategy, favouring diversified growth (basic materials) and high cash returns (telcos, utilities) principally at the expense of the consumer and financials sectors. Gold also remains highly attractive in our view.
03/12/2010 Equity strategy and market outlook - December Download:Log in to access report
Events from the last month constitute a familiar pattern to the extent that equities continue to exhibit profound swings both to the upside and downside as investor psychology appears to be overruling fundamentals. A review of the latter suggests the same familiar problems beset the global economy, namely a lack of suitable policy instruments to manage the ongoing painful process of deleveraging across the developed world. Stagnating growth and rising inflation represent other concerns. These factors have somewhat masked a recent improvement in corporate earnings, but as fundamentals move back to dominate, there is a risk that these encouraging results patterns may not prove sustainable. Looking ahead to 2011 we consequently see no reason to change our current equity strategy, favouring diversified growth (basic materials) and high cash returns (telcos, utilities) principally at the expense of the consumer and financials sectors. Gold also remains highly attractive in our view.
02/11/2010 Equity strategy and market outlook - November Download:Log in to access report
Stock markets edge higher, but we do not feel that recent gains will prove sustainable. In particular, we believe excessive faith has been placed in the potentially restorative powers attached to a further round of quantitative easing. Such a policy may not help correct underlying issues and could only serve to stoke already nascent inflation. The current Q3 reporting season may be as good as it gets in the near term; benefits from cost savings have mostly come through and future revenue growth (even with more QE) will become harder to detect. We also see relatively limited valuation support at present. Against this background, we retain our current equity strategy, favouring diversified growth (basic materials) and high cash returns (telcos, utilities) principally at the expense of the consumer sectors.
04/10/2010 Equity strategy and market outlook - October Download:Log in to access report
Last month’s rally is encouraging for equity investors and may help restore some much needed optimism. However, it masks neither the fact that equities are only just (<5%) in positive territory year-to-date nor the fact that fundamentals remain highly challenging and indicators broadly inconsistent. We continue to believe that consensus expectations do not fully reflect a scenario of slowing growth for 2011 and that nascent inflation could undermine top-line prospects over coming months. Moreover, headline multiples of c 14x earnings for both the UK and US equity markets clearly do not constitute value territory. Against this background, we have become more defensive in our stock selection and prefer to play undervalued names with either strong global exposure or strong cash returns. Basic materials and telco score highly for us; consumer names least so.
01/09/2010 Equity strategy and market outlook - September Download:Log in to access report
We expect global equity markets to remain under pressure through until the end of the year. Impending macro and micro data are likely to point to a further deterioration in momentum. Global GDP growth estimates are successively being downgraded and, for as long as both rising unemployment and inflation persist, we see risks to consensus earnings expectations particularly since we do not believe that a weaker outlook scenario is fully discounted in valuation levels. Against this background, we see few attractive options for equity investors (we continue to favour gold as an asset class). In the near term, with risk aversion levels rising, defensives look set to remain in vogue, and we can also construct a positive case for the financial sector. By contrast, we retain our cautious stance on consumer cyclicals. Longer-term, our preference is for stocks that offer high global diversification and undervalued growth potential.
03/08/2010 Equity strategy and market outlook - August Download:Log in to access report
Recent gains in global markets are unlikely to prove sustainable in our view. Our fundamental concerns over the sustainability of nascent growth have not dissipated. Sovereign debt issues, inflation, unemployment and confidence trends all point to a slowdown in growth over the next 12 months, a scenario that we do not feel is fully discounted in consensus earnings expectations. With estimates potentially under pressure, it is also hard to find support in valuation levels, with the UK equity market trading on around 15x 2011 P/E. Against this background, we see few attractive options for equity investors (we continue to favour gold as an asset class). In the near term, we expect to see further positive momentum for financials and retain our cautious stance on consumer cyclicals; longer-term, our preference is for stocks that offer high global diversification and undervalued growth potential.
01/07/2010 Equity strategy and market outlook - July Download:Log in to access report
There are few causes for optimism as we enter the second half of 2010. The downward pressures being exerted on global equities as a function of ongoing uncertainties appear unlikely to dissipate in the very near term and we believe volatility will continue to dominate markets over the summer. We still see a disturbing confluence of substantial state debt burdens, rising inflation, persistently high unemployment and stalling earnings momentum combined with limited valuation support. This leaves few obvious attractive options for equity investors (we continue to favour gold as an asset class) and our strategy for sector and stock allocation relates to adopting a longer-term focus, preferring positions that offer high global diversification and undervalued growth potential. Near term, high yielding plays are likely to find most favour. On the negative side, we retain our high conviction underweight in consumer cyclicals.
01/06/2010 Equity strategy and market outlook - June Download:Log in to access report
Volatility and uncertainty have been the key themes for equity investors over the past month, and we see little reason for this to change over the summer. There remains an unappetising cocktail of substantial state debt burdens, rising inflation and growing unemployment. Added to this, earnings momentum is howing some signs of slowing and we do not see valuation levels for equities as being overly compelling. Our strategy for sector and stock allocation relates to adopting a longer-term focus, preferring positions that offer high global diversification and undervalued growth potential. Near-term, high yielding plays are likely to find most favour. On the negative side, we retain our high conviction underweight in consumer cyclicals.
07/05/2010 Equity strategy and market outlook - May Download:Log in to access report
After reaching a 22-month high on 21 April, just four trading days later global equity markets experienced their biggest one-day falls since June 2009. Equities have remained highly volatile and under pressure since, and the All-Share now finds itself down 1.6% relative to 1 January. Such volatility is indicative of the challenges facing investors: macro data and earnings momentum are improving, but risks have far from dissipated and we remain concerned that much of the ‘better outlook’ scenario is already reflected in valuations. Against this background, we maintain our sector strategy and favour a bottom-up approach, preferring stocks with high global diversification that offer undervalued growth potential. From a UK perspective, we are overweight industrial cyclicals and underweight consumer cyclicals.
07/04/2010 Equity strategy and market outlook - April Download:Log in to access report
Strong earnings momentum and increasing investor confidence have helped drive the UK stock market up 6.6% year-to-date with the FTSE currently standing at a 21-month high. We still have our concerns – primarily over the risks relating to debt levels, public sector spending cuts, unemployment and otentially slower economic growth – but at present, it is hard to disagree with the prevailing sentiment of optimistic opinion. Against this background, we have become more confident on the outlook for basic materials, industrials and the oil & gas sector, but also continue to favour keeping some exposure to more defensive sectors in the event of any pullback. Overall, we maintain a bottom-up approach, preferring stocks with high global diversification that offer undervalued growth potential.
03/03/2010 Equity strategy and market outlook - March Download:Log in to access report
The cloud of uncertainty that hangs over both the UK and global economy as well as its stock markets refuses to dissipate. As we have written previously, the lack of direction in equities – which has played out for the first two months of the year – is indicative of our uncertainty thesis. Macro data points and road caution from many commentators suggest to us that risk aversion levels continue to rise and, against this background, we see little reason to change our sector allocation strategy. Within equities, we remain overweight utilities and telecoms, but can also find favour for basic materials. Meanwhile our core underweight positions are also unchanged, namely, in financials and consumer (goods and services).
01/02/2010 Equity strategy and market outlook - February Download:Log in to access report
The tumultuous events of January serve only to reinforce our conviction in our thesis on equities: namely there is a strong case for adopting increasingly defensive portfolio strategies. Risk aversion is replacing risk appetite and the list of potential uncertainties about the outlook – namely global GDP trends, banking sector regulation and reform, earnings momentum and visibility and the health of the consumer – continues to rise. Against this background, we reiterate our view on sector allocation: overweight utilities and telecoms (based on their defensive characteristics), and also basic materials (we remain mostly confident about global demand trends and the sector appears cheap); underweight financials and consumer names (risks rising in both sectors).
11/01/2010 Equity strategy and market outlook - January Download:Log in to access report
In summary, we expect stock picking to come back to the fore in 2010 and against this background favour high-quality growth stocks on modest valuations, especially those with diversified global exposure. From a sectoral perspective, we advocate moving to more overweight positions in defensive sectors such as telecoms and utilities, particularly given early cyclicals appear to have run their course and risks will likely rise as the year progresses. We believe it is still defensible to retain an overweight position in basic materials given global growth prospects. On the negative side, we have structural and valuation concerns over the financials and consumer (goods and services) sectors.
