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23.10 Liontrust Views Autumn 2023 Literature (Single) - Flipbook - Page 7


UNITED STATES
STOCKS
EMERGING MARKETS
BONDS
The AI theme has dominated the US stock
market in 2023. There is no doubt that AI
will become increasingly prevalent in our
lives and has productivity benefits, but it
has potential shortcomings too. We believe
the stocks that have benefited from the AI
premium will not go up in a straight line. We
have had some exposure to the AI theme
through US growth managers and index
funds, but we remain careful.
Notwithstanding a handful of stocks whose
valuations have run on the back of AI
speculation, we believe the expensive US is
now more reasonably priced, with value to be
found beneath the technology behemoths. The
US economy remains in relatively solid shape.
While long-term earnings could be good,
we think active management of exposures
to companies within the US market is still
warranted. US government bond yields (the
interest paid) are above 3%, which offers
greater diversification because of the various
interest rate policies around the world.
BONDS
We believe that Europe is looking more
settled after having been the region most
at risk from a protracted conflict in Ukraine.
While there could be a risk of something
going wrong on its eastern flank, this is hard
to predict. The region’s equities have been
unloved post Russia’s invasion of Ukraine
but given that Europe is home to many multinational businesses linked to the global
growth story, like the UK’s large caps, this
sentiment may be disproportionate.
We remain neutral though. We believe that
Europe is still relatively less attractive than the
UK, due in part to its one-size-fits-all inflation
policy. This could lead to inflationary hotspots
and provoke headwinds for European bonds.
.
BONDS
We have reduced our ranking of emerging
market debt from four back to a neutral
three. We had raised our rating from three
to four in the first quarter of 2023 because
we believed that the yields (interest paid)
available represented a good return for the
lower credit quality, which was similar to
our opinion of high yield debt. However,
the current higher interest rate environment
could make it harder for businesses and
governments to fund their debts. The war in
Ukraine also shows the political risks inherent
in the emerging market debt markets.
We continue to believe several emerging
markets are financially better positioned than
their developed counterparts because they
refrained from injecting extreme levels of
financial support into their economies during
the Covid pandemic. But our view remains
that in the current environment, investors will
be potentially better rewarded by emerging
market equities than the debt. We believe
the strength of the dollar also represents an
economic headwind for many emerging
market debt issuers and poses potential
repayment affordability problems for hard
currency emerging market debt.
ASIA PACIFIC
EUROPE
STOCKS
STOCKS
UNITED KINGDOM
STOCKS
Fears that China’s post-Covid recovery is
running out of steam and tensions with the
US have been detrimental for Asia’s markets.
After reopening late last year after Covid,
China’s economy still faces declining trade
activity and a weak property sector. How
China supports its economy will be key
going forward.
Risks remain in terms of global investor
sentiment towards the region, but Asian
economies did fare well during Covid and
we still believe that over the longer term,
Asian stocks will benefit from strong and
favourable demographics.
STOCKS
BONDS
The UK stock market has underperformed
so far this year, but we believe it could
outperform other major markets. The UK
has significant exposure to the energy and
financial sectors and while we can’t predict
when the stock market will turn, it will not
require a major catalyst. Global investors
can avoid the UK but then they would be
ignoring an undervalued market.
UK gilt yields (interest paid) are back to the
levels seen under Truss-enomics but without
the panic. Their yields have drifted up from
around 0.7% at the start of December
2021 to above 4.0% as at 31 August
2023 (source: Bloomberg), and these could
continue to rise in line with base rates. We
believe that gilts now offer the prospect of
delivering real yields (above the rate of
inflation) over four to five years once the
inflationary spike abates. We remain neutral
on them, however, as we do not expect they
will be a substantial driver of returns.
JAPAN
STOCKS
We watch Japan closely to see whether its
positive run this year is over, or if it is worth
going overweight its stock market. New
Bank of Japan governor Kazuo Ueda has
pointed to a structural shift in the economy
as growth and wages have picked up after
decades of near stagnation.
The fly in the ointment though is that for
Japan to do well requires a weaker yen,
which will be inflationary. The Japanese
market is also reliant on exports and could
be impacted negatively by any softening in
global economic growth.
LIONTRUST VIEWS – AUTUMN
7