24.01 Liontrust Views Winter 2024 - Flipbook - Page 7
UNITED STATES
STOCKS
EMERGING MARKETS
STOCKS
BONDS
The US equity market is the largest and most
diverse in the world, and it is known for its
innovation and leadership in many industries,
including technology, healthcare, renewable
energy and clean technologies. We have
long been cautious about its arguably
expensive stocks but believe that corrections
in 2022 have brought valuations in general
back to more sensible and less unattractive
levels. Despite this, it does not feel right to
be overweight US equities at present. Also,
for a handful of stocks, valuations have run
high on the back of AI (artificial intelligence)
speculation.
Yields on US treasury bonds reached a
16-year high in October as questions were
raised over the US’ credit quality and the
extent of its debt issuance. However, they
have since fallen on market expectations
of earlier than previously expected rate
cuts by the Federal Reserve in 2024. US
government bond yields above 3% can offer
greater diversification benefits because of
the various interest rate policies around the
world.
KEY
STOCKS
BONDS
Emerging markets (EMs) have been poor
performers in recent years, which has had
much to do with China and its regulatory
crackdowns, restrictions on debt restructuring
among housebuilders and its zero-Covid
policy. China is a major trading partner to
other EM countries and its weighting in the
EM benchmark indices is around a third,
so its fate weighs heavily on investors’
sentiments towards EMs. Going forward, we
believe EM equities will be more attractive
to investors. China has adopted a more progrowth, stimulus-oriented stance; potential
weakening in the US dollar would help EMs
to benefit from their own currencies’ relative
appreciation; and they could also benefit
from changes in supply chains that are
happening globally.
The yields on emerging market debt (EMD)
early in 2023 represented a good return
for the lower credit quality, but these have
since fallen and we believe that investors
should not underestimate the risks posed in
a generally higher yield environment, which
could make it harder for governments and
corporates to fund their debts.
Overweight
EUROPE
UNITED KINGDOM
Europe has adjusted surprisingly well from
the energy challenges created by the conflict
in Ukraine. The pandemic and energy crisis
have galvanised the region’s leaders and put
an end to a prolonged period of punishing
austerity and negative interest rates. It is
also home to many multi-national businesses
linked to the global growth story. Investors
might have been right to shun the continent’s
stocks for much of the last decade, but we
believe they should now consider Europe’s
role in their portfolios.
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.
.
STOCKS
A relatively strong economic growth outlook,
benign inflationary pressures and potential
policy easing on the horizon paint a positive
picture. This should translate into generally
stronger corporate balance sheets. We
believe equity valuations are attractive relative
to developed markets and on sustainability,
there is potential for significant structural
growth in Asia across a range of themes,
including better access to good health, energy
transition and financial inclusion.
Investors’ concerns around China’s post-Covid
recovery losing momentum, its ailing property
sector and tensions with the US have been
detrimental for Asia’s markets. But longer term,
we still believe that Asian stocks will benefit
from strong and favourable demographics.
BONDS
The UK market has been unloved by
international investors since Brexit. But
unloved can also mean undervalued, and
the FTSE All Share Index represents good
value that compensates for the political
uncertainties and gloomy forecasts for the
domestic economy. Much of the case for
UK equities now is that a lot of pessimism is
priced into their valuations. These companies
are cheap both compared to global equities
and their longer-term average. It is hard to
predict when the UK will turn, but to our mind
it will not require a major catalyst.
Gilt prices rose over the last quarter of 2023
as their yields (the return investors expect to
receive each year to maturity) fell because
of expectations of interest rate cuts in 2024
(the prices of bonds and yields are inversely
related). We remain neutral on gilts though,
in line with our overall view on fixed income,
because we do not expect they will be a
substantial driver of investment returns. We
are positive on UK corporate bonds, however:
we believe that the spreads they offer over
government bonds are attractive, meaning
that high quality businesses are offering yields
that we regard as being good value.
Underweight
ASIA PACIFIC
BONDS
STOCKS
Neutral
JAPAN
STOCKS
We have raised our ranking on Japanese
equities from neutral to positive. Japan’s
stock market rallied significantly in 2023
and we have concluded that its inflationary
regime, which should encourage more
consumption, combined with improving
corporate governance, could create a
more positive environment for the economy
and – crucially – enable the stock market
to flourish.
The Bank of Japan’s new governor Kazuo
Ueda stated in 2023 that Japan was in
a new economic paradigm. However,
Japan’s economy is reliant on exports,
and could be impacted negatively by any
weakening in global economic growth or
trade.
LIONTRUST VIEWS – WINTER
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