With the global economy continuing to provide cause for concern, Mark Barnett head of UK Equities at Invesco Perpetual, reviews the key issues impacting on economies and markets and considers what this could mean for the UK equity markets in 2015.
- “The overall background for revenue growth is likely to remain challenging in 2015”
- UK equity market is “likely to become more volatile”
- “The changes in the political agenda ahead of the UK general election in May 2015 are likely to be another source of uncertainty for the UK stock-market”
The UK equity market is, I believe, likely to become more volatile. The key issues which continue to overshadow the performance of the equity market remain the interplay between growing investor pessimism on the global economic outlook and the ability of policymakers to create the conditions to reinvigorate growth prospects where necessary.
The recent performance of the eurozone and Chinese economies in particular is concerning. Weaker than expected growth in these areas, and the deflationary forces which are exported, will undoubtedly have an impact on other developed economies such as the US and the UK, which performed relatively well in 2014. In my view, the overall background for revenue growth is likely to remain challenging in 2015.
The speed and severity of the decline in the oil price neatly encapsulates both sides of the economic debate. On the positive side, it is certainly a boost to consumption in the developed world. However, it is clearly a deflationary force and represents a reminder of the underlying weakening demand in the Chinese economy. The speed of the recent decline – and how companies respond to this new volatility – represents an additional contributor to stock market volatility.
Given the recent economic news, it is likely that the anticipated increase in rates in the US and UK will be deferred until mid-2015, as there is very little sign of inflationary pressure in these economies, despite rapidly falling levels of unemployment.
The political backdrop both domestically and internationally is another issue which has taken on more relevance in the recent past, but which, I believe, is likely to remain an important influence for the next twelve months. The changes in the political agenda ahead of the UK general election in May 2015 are likely to be another source of uncertainty for the UK stock-market.
Moments of market weakness in recent weeks are symptomatic of some of these concerns. It can be argued that equities continue to look attractive relative to other asset classes, but in some cases absolute valuations still look elevated where share prices do not appropriately anticipate the risk to earnings and cash-flows. The portfolio strategy is therefore largely unchanged. A high price is placed on the companies in the market which offer visibility of revenues, profits and cash-flows in this low growth world and which are managed for the principal purpose of delivering shareholder value in the form of a sustainable and growing dividend.