SUMMARY
Unrelated developments in major global markets will influence future economic growth and expectations.This week we review those that are likely to have the most profound impact.
Investment strategy
October 10, 2021
2 mins
Global markets overview: Around the world in 7 days
October 10, 2021
2 mins
- In the US, we do not expect that growth shares will predominantly be viewed in light of interest rates once market equilibrium is reached. When the US economy normalizes and supply-chain shortages abate, investors are likely to differentiate between technologies that people and businesses cannot live without and those that will see more typical growth rates reflecting the regular economy.
- China’s GDP growth is likely to fall well below 6% in 3Q and the risk of sub-4% growth for 4Q is rising rapidly. Growth is slowing more than policymakers desire. We believe that China will accelerate easing into 2022. Looking at relative valuations, the ratio of mainland stock prices to those in Hong Kong (for companies in both markets) is 1.45 reflecting a high level of pessimism among foreign buyers. We see this as a likely counter-cyclical positive for Chinese equities after a prolonged period of underperformance.
- In recent weeks, 19 provinces in China have suffered power shortages. The high cost of coal is one factor, but the desire to meet strict environmental limits on energy consumption is another. Though energy prices have fallen 20% from peak, they are still materially elevated. All of this suggests that industrial production will remain under some pressure until a new supply/demand equilibrium is reached.
- While high gas prices and shortages in the UK and Europe will have unintended consequences, looking toward Spring, we see these abating. The impact on consumers is mitigated by the structure of energy markets and delivery systems across Europe. Services are delivered by regulated utilities and the consumer’s cost is constrained. We believe that the energy shortage in Europe is temporary and will have a smaller impact on economic performance and inflation than expected.
- We maintain our overweight to UK equities in tactical asset allocation versus our strategic benchmark, taking a 12-18 month view. Over that time horizon, we remain confident of European and especially the UK’s potential for renewed economic strength and EPS growth. The relative valuation of EU and UK shares remain at a significant discount to the US and the global average, while the available dividend yields are the highest in the world.
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