Liontrust Views Spring 2023 - Flipbook - Page 9
UNITED STATES
STOCKS
EMERGING MARKETS
BONDS
For some time, US stocks have been
expensive but recent corrections have brought
valuations back to more sensible levels. This
is in part due to the technology bear market
seen in the US, which has taken some of the
froth out of the growth end of the market.
While this may create opportunities, an
inflationary period does not typically support
growth stocks, which the US continues to
have in abundance. Yet the US economy
remains in relatively solid shape, potentially
benefiting from its isolation in terms of energy
policy and agriculture.
There are potentially attractive benefits in US
bonds, where yields or return on investment
are currently above 3%. While this does not
offer the prospect of inflation-beating yields,
it reflects the fact that the Federal Reserve is
nearer the peak in interest rates than other
developed market central banks. This also
achieves greater diversification because of the
various interest rate policies pervading around
the world. These bonds provide a useful
portfolio insurance in times of market duress but
offer little more than a cushion to equities.
EUROPE
STOCKS
STOCKS
UNITED KINGDOM
BONDS
Emerging markets continue to prove
themselves better at dealing with inflation than
their developed counterparts, with central
banks arguably nearer the peak in interest
rates. However, while long-term positive
fundamentals remain intact, shorter-term
pandemic shocks and recent policy shifts,
both centred on China, hit sentiment in 2022.
Overall, emerging market equities remain
highly geared into sentiment shifts – both
positive and negative – and are also sensitive
to domestic and international politics.
Valuations are attractive for emerging
market bonds while several emerging
markets are financially better positioned
than their developed counterparts because
they refrained from injecting extreme levels
of financial support into their economies.
However, dollar strength represents an
economic headwind for many emerging
market debt issuers.
ASIA PACIFIC
BONDS
European stocks have been unloved post
Russia’s invasion of Ukraine and have come
under pressure. Arguably, they have been
impacted disproportionately now, given
that Europe is home to many multi-national
businesses linked to the global growth story.
However, the European Central Bank’s
fight against inflation looks increasingly
challenging while Europe remains the region
most at risk from continued conflict in Ukraine.
The European Central Bank remains
committed to tackling inflation with recent
further interest rate hikes, and ongoing
uncertainty about the path of inflation. This,
if coupled with a more significant recession
than expected, could create headwinds for
European bonds.
STOCKS
STOCKS
BONDS
UK equities remain cheap despite the
2022 energy bounce and the value stocks
being favoured. The UK outperformed other
developed markets last year but there is still
a long way to go, particularly if the value
rotation continues: financials, for example,
should benefit from higher interest rates than
we have seen for many years.
UK government bond yields have increased
and could climb higher, and now offer the
prospect of delivering returns above inflation
over four to five years once the inflationary
spike abates.
JAPAN
STOCKS
In common with emerging markets generally,
Asia is benefiting from rising inflation and
loose monetary policies. While these
economies generally fared well through
Covid, much rests on China and how it
supports its economy in the months ahead.
While Japanese stocks sold off in line
with others in 2022, the country is largely
unaffected by current political tensions.
However, the Japanese market is reliant
on exports and, as with Europe, softening
global growth could be problematic.
A weak US dollar provides a supportive
environment for Asian economies. Risks
remain from the perspective of global
sentiment as well as regional political
tensions, although Asia has performed well
thanks to its commodities.
The Bank of Japan continues to be more
positive than other central banks with
interest rates expected to stay low. It
remains to be seen whether this period
results in some imported inflation (after
decades of deflation), which could have
an impact on Japanese stocks.
LIONTRUST VIEWS – SPRING
9
