23.08 Liontrust Views Summer 2023 Literature (Single) - Flipbook - Page 9
UNITED STATES
STOCKS
EMERGING MARKETS
BONDS
We have long been cautious on the
expensive US stock market but the corrections
seen in 2022 bought valuations of US
equities down to more attractive levels. The
technology bear market experienced in the
US last year helped to dispel some of the
overheating among growth companies in
the market, which opened up opportunities
to invest in these stocks at more attractive
valuations. But these were not helped in
2022 by the high inflationary environment.
Expectations that the recent series of rate
hikes by the Federal Reserve was coming to
an end, combined with the dramatic culling
of staff by US technologies giants, has driven
outperformance in US growth stocks this
year, however. A groundswell of interest in
AI-related stocks has also catalysed the rally.
The US economy remains in relatively good
shape but active exposure is warranted.
Yields on US government bonds are above
3%, reflecting the fact that the Fed is further
through its rate hiking cycle than many other
central banks in developed economies. This
also offers diversification because of the
different interest rate policies across the world.
BONDS
Emerging markets have regularly shown
themselves to be more adept at dealing
with inflation than developed markets.
Arguably further ahead of the curve than
their counterparts, this has allowed them to
implement more appropriate policies. Long
term, the fundamentals are strong, despite
sentiment being hit by China-related pandemic
shocks, but the Chinese economy has showed
some signs of recovery this year following the
lifting of the draconian lockdown restrictions.
Overall, emerging markets remain highly
impacted by changes in investor sentiment
and domestic and international politics.
Emerging market bonds are currently attractive,
more so than high yield, although this is finely
balanced. While credit risk ratings in these
bonds are generally superior to high yield,
there is inherent political risk in these markets.
As with equities, emerging market bonds
are further ahead in the cycle than their
developed counterparts and are financially
stronger as a result of refraining from injecting
substantial levels of financial support into their
economies.
ASIA PACIFIC
EUROPE
STOCKS
STOCKS
UNITED KINGDOM
BONDS
STOCKS
Europe has been the region most at risk
from the protracted conflict in Ukraine due
to its exposure, with parts of the bloc heavily
dependent on Russian energy. The region’s
equities have come under pressure as a
result and have been unloved. However,
with Europe home to many multi-national
businesses, arguably they have been
impacted disproportionately.
Similar to the environment for emerging
market equities, Asian equities have seen the
benefits of rising inflation and loose monetary
policies being seen globally. While these
economies generally fared well through
Covid, the focus continues to be on China,
and in particular the measures it is looking to
take to boost the economy and the impact of
these in the months to come.
There are benefits in looking beyond the
UK when it comes to bonds, achieving
diversification due to the different approaches
taken globally to tackling inflation. Having
said this, the European Central Bank’s
ongoing fight against inflation – in particular
it’s one-size-fits-all policy – could lead to
inflationary hotspots and provoke headwinds
for European bonds.
Risks remain from global sentiment as well as
regional political tensions, although Asia has
performed well thanks to its commodity links.
STOCKS
BONDS
In 2022, there was a rebound in UK
equities thanks to an energy bounce and
the skew towards value companies. Yet
despite this, UK equities are still cheap,
especially compared to other developed
markets. In the second quarter of 2023,
there was disappointing performance but
if the value rotation continues then sectors
such as financials should benefit more than
we have seen for many years.
UK government bond yields (which is the
return you can expect from the bonds) have
increased to around 4% and now offer the
prospect of delivering real yields (above
the rate of inflation) over four to five years
once the current inflationary spike abates.
Yet while offering their best value for some
time, they are unlikely to drive significant
portfolio returns, instead providing a useful
hedge against the performance of equities
in times of market stress
JAPAN
STOCKS
The prospects for Japanese equities now
look rosier, thanks in part to a weakening
in the yen and the first signs of inflation
for some years. In 2022, Japanese stocks
sold off in line with others, but in fact the
country is largely unaffected by prevailing
geopolitical risks. The current global
environment may impact Japan because
of its reliance on exports and, as with
Europe, softening global growth could be
problematic. However, the weakness of the
yen may help to counteract this for now.
LIONTRUST VIEWS – SUMMER
9
