UK outperforming India and China? Surely a mistake?
Brian Dennehy
Despite a number of well publicised negatives (particularly concerns over sovereign debt, which stretches far beyond Greece, the Chinese beginning to take the steam out of their economy, and concerns over a hung Parliament) the UK stock market has performed better than many others in Europe and around the globe (including the likes of China and India) over the last month.
So what is going on? Firstly volume has not been high, so even a relatively small amount of institutional cash has the ability to push the UK market somewhat higher. Secondly, while the fall in the value of the pound sterling has mostly generated negative headlines, the institutional buyers of the stock market understand that this is positive for most large companies – 70% of earnings from FTSE 100 companies are generated in foreign currencies, so when the pound falls it pushes their profits up.
But hold on - we said take profits last November! Actually we said take profits in China from last September (see more below), and as the year went on suggested you continue to reduce risk in your portfolio, and look to areas where there was more obvious value.
What has actually happened is that global investors lost money or made no net progress. Since November the the FTSE World index has gone sideways in US dollars. But for UK investors the same index has been hitting new highs in pounds sterling. Currencies are typically not managed within an equity fund, so this is a stroke of good luck for UK investors. Currencies are very volatile, and in so far as sterling might continue to weaken and create an opportunity, we prefer to gain an exposure to this through global bond funds, who are experts in currency management.
Returning to the UK stock market, back in December we did highlight the possibility that if interest rates remained low, stock markets (not just the UK) could go much higher than most expected in 2010. But at the moment the strong UK stock market move in February is anomalous in a global context. So stay on your toes, particularly with the UK General Election just ahead.
What about Asia and emerging markets? They have been very profitable since the lows of March 2009, but there has been stalling for a few months, led by the Chinese stock market (which peaked last August in local currency terms, and we were cautious from last September). The debate over China has hotted up lately with the launch of the new Fidelity fund managed by the legendary Anthony Bolton, and also because a healthy Chinese economy is vital for a global economic recovery. We continue to be optimistic taking a long view, but are still cautious in the short term – this is covered in our review of the Fidelity China launch.
What about alternative asset classes, corporate bonds in particular? From New Year to the end of February the FTSE 100 index went down 0.4%, whereas Henderson New Star Sterling Bond was up over 4%, as was Old Mutual Corporate Bond, and with little volatility. In the long run of course we expect equities (particularly high yielders) to sharply outperform bonds (whether corporate or sovereign) but in the year of transition that lies ahead (as government stimulus is withdrawn, and countries learn how to cope with huge deficits), there will be pain for equities. Corporate bonds are not immune to this, but the last two months of limited volatility (and some upside) highlight that their reaction needn’t be extreme.
Date: 09.03.2010