Global equities have begun to perform better in the past week or so simply because valuations are much more reflective of economic reality, according to Rupert Thompson, investment strategist at Kingswood.
Thompson said that after several years of equities underperforming: “Equity markets bounced strongly last week, posting their first weekly gain in nearly two months. Global equities rose 4.5 per cent in local currency terms, leaving markets down 11 per cent from their highs.
“In a further reversal of recent trends, the US was the strongest performer, gaining 6.6 per cent as growth stocks recouped a bit of their pronounced underperformance this year. UK equities saw a 2.6 per cent rise while Asia and emerging markets were broadly unchanged over the week.
“The market bounce is in large part just an overdue technical correction to the fairly relentless decline seen over recent weeks. But it also reflects the fact that market valuations now look considerably more reasonable and appropriate for the new more stagflationary environment.”
He said the stronger performance of equities has not been driven by any particular change in the macroeconomic climate, given the inflation and interest rate data which has emerged.
His view is that those data points served only to confirm what the market already believed was going to happen, rather than a yet worse outcome.
Thompson added: “Meanwhile, business confidence, which had been holding up surprisingly well, weakened significantly in May in the US, EU and UK. Even so, it remains comfortably above levels associated with a recession and the sharp fall in consumer sentiment in recent months is rather more of a concern. The largest fall in business optimism was seen in the UK but this was followed in short order by the Chancellor’s latest move to alleviate the cost-of-living squeeze.
“Rishi Sunak announced a £15bn package of support measures with £9bn going to low income and vulnerable households. A third of the cost is to be funded by a 25 per cent windfall tax on the profits of energy companies.
“The package is worth around some 0.6 per cent of GDP and should help avert the modest decline in the economy forecast by the Bank of England for later this year. This in turn makes it all the more likely that interest rates will be raised rather more than the Bank has been indicating. Rates look set to increase from their current 1 per cent level to around 2 per cent by year-end.
“Last week’s bounce certainly does not mean markets are out of the woods yet and they look set to remain volatile over coming months. That said, it is an indication that if the markets’ worst fears are averted as we expect, equities should in time be able to recoup a good part of their losses.”
david.thorpe@ft.com
