According to the FCA, over 40% of UK adults each have savings of more than £10,000, which is reassuring but it seems a great deal of this is not invested. Recent newspaper reports cite Barclays Bank estimates that 13 million UK adults hold £430 billion in cash deposits.
Cash can be a good place to park savings for the short term as the returns are not subject to the volatility experienced by investment markets. Extending the time savings are kept in cash and not investing in asset classes like equities and bonds, however, means potentially missing out on generating real returns to enable spending power to exceed the rate of inflation over the long term.
The gap between cash and investing is potentially exacerbated at the moment by the fact that interest rates have started falling and we believe stock markets in the UK and internationally are offering attractive valuations. This latter point may seem surprising given the fact that the US S&P500 index reached yet another new all-time high at the end of September. Yet it is important to remember that the US stock market has been driven to current levels in large part by a handful of mega caps including Nvidia and Apple, which have benefited from the fever-like excitement around AI.
The market environment is changing, however. Revenues that have been delivered by US mega and large caps are spreading beyond these stocks, not only in the US but also in international markets. This is at a time when cheaper valuations are available outside large caps.
Our optimism about the outlook and valuations is demonstrated by the fact that the Liontrust Multi-Asset team currently has a tactical score of four out of a maximum of five for equity markets in general. All equity markets are not equal, however, and some offer greater value than others.
The table below shows that that on a price to earnings (PE) and price to book (PB) basis, the UK offers the most value, with ratios of 12.2 and 1.9 respectively, and we have a tactical outlook, including small caps, of a positive four out of five. Expectations were raised when the Labour government won a large electoral majority in the summer with a commitment to economic growth. There is hope the Budget on 30 October will deliver the catalysts required for investors in UK-listed companies to realise their attractive valuation opportunities.
Valuations in global equity markets
| P/E | Est. P/E 1-year | P/B | Dividend yield | 10-year govt. bond | |
| UK (FTSE 100) | 12.2x | 12.4x | 1.9x | 3.8% | 4.0% |
| US (S&P 500) | 24.5x | 23.7x | 5.1x | 1.3% | 3.8% |
| Europe (Eurostoxx 50) | 14.0x | 14.3x | 2.1x | 3.2% | 2.1% (Bund) |
| Japan (Nikkei 225) | 22.8x | 21.1x | 2.0x | 1.8% | 0.8% |
| China (Shanghai Shenzen 300) | 16.1x | 14.7x | 1.7x |
2.5% |
2.1% |
| MSCI Emerging Markets | 16.0x | 14.0x | 1.9x | 2.5% | 7.1%* (JPM EMBI) |
Source: Bloomberg/Liontrust, 02 October 2024; *External (hard currency) debt. Past performance does not predict future returns.
Over the last two to three years, China’s slowing economic growth and trade tensions with the US have weighed on emerging markets (EMs). We believe there are several reasons why EMs may now be more attractive. China’s central bank recently announced a new wave of monetary stimulus and EMs could benefit from the relative appreciation of their own currencies versus a potentially weakening dollar following the US Federal Reserve’s recent half-point interest rate cut. EM countries tend to borrow in US dollars so a weaker greenback makes it easier for them and their companies to service their debts.
While US-China relations remain complicated, the reorganisation of strategic supply chains could create new opportunities for EMs other than China.
Two of the most expensive markets are the US and Japan after enjoying strong performance over the past couple of years despite the pullback in early August. However, while we are neutral on US equities from a tactical view, we do have a positive score of four out of five for US smaller companies and are bullish on the Japanese market, including smaller companies.
The fact that Japan is in an inflationary environment for the first time in a couple of decades should encourage more consumption and, together with an improving corporate picture after years of underperformance, gives us a positive view of the outlook for the stock market.
If, as we believe, the concentration in equity markets of the mega caps in the US lessens over time and revenues and share prices broaden beyond them then it is important to consider what the relative impact will be on active managers and passive vehicles within portfolios. If you take the US, which is the biggest passive market, the top 10 holdings in the S&P index represent around a third of the whole index. For the last time we saw this concentration in the S&P500, according to one of our US fund managers, you have to go back to the Great Depression. The market conditions back then were entirely different to what we have today and we do not believe all the growth comes from just a few stocks.
While passive vehicles have certainly helped us over the years in terms of a broader universe of options to use within portfolios, there is a big opportunity now for active management, particularly in mid and small caps, and for savings to work harder for investors than keeping them in cash.
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
The Funds and Model Portfolios managed by the Multi-Asset Team may be exposed to the following risks: Credit Risk: There is a risk that an investment will fail to make required payments and this may reduce the income paid to the fund, or its capital value. The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay; Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss; Liquidity Risk: If underlying funds suspend or defer the payment of redemption proceeds, the Fund's ability to meet redemption requests may also be affected; Interest Rate Risk: Fluctuations in interest rates may affect the value of the Fund and your investment. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; Derivatives Risk: Some of the underlying funds may invest in derivatives, which can, in some circumstances, create wider fluctuations in their prices over time; Emerging Markets: The Fund may invest in less economically developed markets (emerging markets) which can involve greater risks than well developed economies; Currency Risk: The Fund invests in overseas markets and the value of the Fund may fall or rise as a result of changes in exchange rates. Index Tracking Risk: The performance of any passive funds used may not exactly track that of their Indices. Any performance shown in respect of the Model Portfolios are periodically restructured and/or rebalanced. Actual returns may vary from the model returns.
The risks detailed above are reflective of the full range of Funds managed by the Multi-Asset Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
