The FTSE 100 index finally breaking through 7000 prompted questions as to whether markets are looking expensive. With the MSCI World index and the MSCI China index also recently hitting new highs and resistance levels close for Nasdaq in the US and the Stoxx index in Europe, the question is a global one.
It might be worth an equities world tour flagging up our current views en-route.
UK – underweight:
UK equities may be priced a little above the long-term average but not sufficiently to over-concern us. Our underweight position is more about protecting clients from market volatility as the May election looms.
US – just moved to neutral
Our US equity overweight has served clients well but monetary easing and the slow maturing of the economic cycle are leading to higher employment and modest wage increases. The US corporate sector is showing strain from the dollar’s strength (which we think will continue).
Europe – just moved to overweight:
Europe by contrast is demonstrably benefiting from euro weakness and we are starting to see mutual fund flows out of the US and into Europe.
The ECB has now made convincing moves to emulate the monetary policy measures already implemented in the US, UK and Japan. The initial impact was a sharp weakening of the euro, which took the edge off returns to sterling based investors in Europe but the investment picture now looks more attractive.
The cyclically adjusted PE multiple (the so-called Shiller PE) for Europe is still below its long-term average, and well below that for the US. Most value is seen in large caps at the moment and Germany looks like the biggest beneficiary of QE.
Japan – continue to be overweight
Our strategic orientation has been towards those economies in the early stages of convincing stimulus measures. We saw the benefit of this in the UK, the US. We are still seeing it in Japan. Japan’s PE remains below its 15-year average and still offers value.
Asia – just increased overweight position
We talked last month about catching ripples and how the economic success of the US is likely to cascade down, with Asia a particular beneficiary.
Emerging Markets – underweight
Emerging market valuation multiples are cheapest – in part due to the influence of markets such as Russia that are cheap for a good reason.
This is a reminder that labels like “cheap” and “expensive” are not necessarily helpful. As investors we should be considering value, prospects and momentum.
Rosie Bullard Portfolio Manager, James Hambro & Partners
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