Part one of our outlook for the remainder of 2018 looks at the UK.
The UK: What should investors be wary of in the remainder of 2018?
Volatility dominating the UK
The first half of 2018 has witnessed a pickup in market volatility which had peaked in February and March but fell off in Q2; Brexit negotiations continued to test the confidence of the UK government and there was the threat of a trade war from the United States – these events are of course amongst a number of others. The question is; what should investors be wary of in the last six months of 2018?
Our Investment Research Manager, Sheridan Admans, gives his thoughts on the next 6 months in part one of our 2018 outlook.
United in name, but still not in nature; is now a good time to invest?
It wouldn’t take a genius to recognise that increasing questions over Brexit, UK politics in general, as well as the country’s position on the world stage has resulted in increased pessimism and ultimately the UK becoming the most unloved developed market to invest in. However, sentiment towards the UK has got so bad that I would suggest that now might be a good entry point for contrarian and value investors.
Yes, Brexit is likely to continue to be a drag on investor confidence in the interim but the economic situation has been better and more resilient than many expected; the wheels haven’t come off! Indeed, in the Spring Statement the chancellor raised the UK growth forecast to 1.5% up from 1.4% and borrowing expectations were revised down. A small current surplus is expected in 2018/19 which should leave some room for borrowing to fund capital investment rather than meet day to day spending needs. All the while, the forward P/E on the All Share index is around 13 to 14 times earnings; well below the long-run average and rates are still likely to remain below historical norms for some time to come.
Does unpredictability equal opportunity?
Volatility has picked up and is likely to be a normal feature of market activity once more. Volatility, or lack of it in past years, was a consequence of investors not understanding the excessive risks they were taking due to the distortion of ultra-loose monetary policy. Policy is now being tightened in parts of the market while being left loose in others. In addition, the political backdrop has become more turbulent, trade disputes are making investors nervous.
While a pick-up in volatility has been more challenging for investors to navigate, it does create opportunities, cultivating an environment that should be more conducive to active management.
So, what’s in store?
We continue to expect returns from equities to moderate for the remainder of 2018. We still maintain a preference for equity investing over fixed income as we believe the ‘Euphoria’ phase in the cycle has not yet been reached. This is despite having reservations over valuations and levels of influence in some parts of the market. We’d encourage investors to have some exposure to gold as a diversifier at this point in the cycle as inflationary pressures, declining mine production, political instability, and the potential of an escalation in trade tensions may well increase the possibility of a period of significant rises in the price of gold. Where investors need some exposure to fixed income in their portfolios we believe they should be shortening their duration exposure and increasing the credit quality.
As highlighted, we have become more contrarian on the UK and with volatility picking up in the market, it can create opportunities within a more challenging environment. Brexit is a continuing cause of uncertainty for investors but the economic situation has been better than many expected, proven by the rise in the UK growth forecast. We continue to hold our preference for equity investing over fixed income going forward, and encourage some exposure to gold as a diversifier.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.