Regardless of which of these, or alternative rationales, end up reinvigorating equity popularity we are optimistic that enthusiasm can return and there are some early indications in the aggregate flow data to suggest that process is starting to occur (inflows into equity funds globally have picked up materially in the year to date for example). As such, we are potentially coming to the end of the structural bear phase and consequently are in the very early stages of a new structural bull market.
If the medium-term outlook is an optimistic one, what of the near-term outlook? While there are always issues that can give rise to temporary bouts of volatility (such as ongoing eurozone unrest, geopolitical tensions in the Middle East, slowing growth in China and debt ceiling debates in the US), my view remains constructive, driven by a re-acceleration of economic growth momentum globally, attractive valuations and earnings forecasts that look appropriately set following a period where growth expectations have been recalibrated lower.
The most significant recent development though centres on government bond yields that, having risen sharply recently, look to be heading higher into the medium term more or less across the globe. If this proves the case then it is highly likely that sector leadership within the UK equity market will change.
Over recent years UK equity market performance has been dominated by stocks that can best be summarised as ‘bond-like’. That is, those companies that have exhibited steady, consistent earnings growth with low variability. The chart below highlights the extent of the recent outperformance of such defensive growth shares.
In an environment of rising bond yields and accelerating economic growth I suspect the relative attractiveness of such stocks will fade and new leadership will emerge. In particular, consider the following two key areas for future leadership in the UK market:
• Financials. Banks, life insurers and financial services companies are prime beneficiaries of a rising bond yield environment. Banks in particular still suffer from the legacy issues of the global financial crisis, with many investors remaining cautious on the sector given ongoing regulatory threats and uncertainty of balance sheet cleanliness and strength. Therein lies the recovery opportunity still to be fulfilled as the world continues to slowly recover and normalise.
• Cyclical sectors. As growth reaccelerates cyclical sectors of the market typically perform well. We are particularly keen on opportunities in industries such as travel and leisure, general retail, support services and house building and have numerous holdings in these areas where the outlook remains extremely positive.
