The UK stock market lost less ground than its peers during the early August slump sparked by fears of recession, and it has since rebounded sharply. In a few short weeks, it has made up all its losses and is almost back at its record highs, which is more than can be said for eurozone markets. This trend seems to have gone almost unnoticed – investors have been ignoring the UK stock market because it has underperformed for several years now. Over the past decade, the total return on the UK stock market has been just 6% per year, which is well below that of either the US or eurozone markets. This underperformance is due in part to the very mixed trend in UK earnings and also to the decline in multiples caused by investors moving out of the market, with net outflows riding high. Few stock markets in the developed world are offering such attractive valuations – the discount compared with the US stock market is around 30%. So when will be the right time to move back into this market? There needs to be something more than just low valuations. While sentiment has been dragged down by the political uncertainty in France, investors have reacted well to the outcome of the UK elections. The new Labour government appears moderate and wants to spur private investment. That’s a sensible move, given that UK investment has been low for the past 20 years. The new government has also promised to engage with the European Union. And the economy began to pick up even before the election, delivering some positive surprises. Soaring inflation had forced the Bank of England to raise rates sharply, which hurt consumer spending. Inflation is now coming down, enabling the BoE to cut rates for the first time, from 5.25% to 5%. That trend should continue over the coming months, which is good news for the economy. This will be a boon for risk assets in the UK. On top of that, outflows are levelling off. The only downside is that the government doesn’t have much room for manoeuvre from a fiscal point of view. If the economy remains robust and the BoE keeps loosening monetary policy, we’ll consider increasing our exposure to the UK market.
Jerome Powell’s words have left no room for any doubt – the US Federal Reserve is getting ready to loosen its monetary policy. It will lower rates for the first time at its meeting on 18 September, and further cuts will follow later this year and next. Inflation has eased considerably, so the Fed is in a comfortable position. How hard and fast it lowers rates will depend on the state of the US economy. Both the stock and bond marks gained ground on this news. But falling interest rates could hurt the US dollar. Last week, it dropped below several technical support levels against a number of currencies, including the euro. The greenback seems to have entered a downward phase, and we’ve reduced our exposure to it (down 3 percentage points to 15% for CHF-denominated balanced investment profiles) through exchange-rate hedging and a switch to bonds denominated in Australian or New Zealand dollars.
Gold has reached another all-time high, pushed up by the weaker dollar and by central bank demand. Besides, investors are not yet overly bullish on the metal.