A recent Financial Times analysis of global asset classes has found that an investment in the FTSE 100 over the first quarter of 2018 would have shown the worst possible returns. Pessimism on the part of institutional investors towards the UK’s largest companies combined with a strengthening pound sterling to result in a disappointing three months. However, the UK blue chip index’s 8% loss may now mean a good buying opportunity.
The best performing investments over the period were commodities such as oil and gold, benefiting from a 3% slump in the value of the US dollar. Emerging market equities also staged a rally with Brazil’s benchmark Bovespa the best performer among significant global indices, up 12%. Other EM indices to show strong returns between New Year and the end of March were Russia’s Micex and China’s MSCI, with respective gains of around 8% and 5%. EM currencies also soared. Mexico’s peso surged 7.5% against the dollar while South Africa’s rand rose around 8%. US equities also had a rough quarter with the S&P 500 down over three months for the first time in nine quarters. A run on mega cap tech stocks such as Facebook and Amazon have led the major US indices into official ‘correction’ territory, halting a multi-year bull run.
However, the shaky start to the year not necessarily bad news for UK and US investors, particularly the former. While most observers agree that a correction of some extent has been inevitable for some time now, the fundamentals underpinning both economies, and the wider global growth the revenues of many of the largest companies derive much of their revenue from, remain stable. Michael Arone, chief investment strategist at State Street Global Advisors, was quoted by the FT as commenting:
“From my perspective the fundamentals of the market remain attractive”.
A recent Morningstar article also discussed international undervaluation of the fundamentals underpinning the UK equities market. Fund managers interviewed were of the opinion that negative Brexit sentiment was being over-priced into valuations in comparison with international peers and that bodes well for a contrarian approach. In an interview with CNBC Larry McDonald, editor of The Bear Traps report was also quoted as stating that UK stocks “will be the place to be” in a year when the Brexit transition begins. He further expanded with:
“U.K. equities are the cheapest equities in the developed world. They are a screaming buy relative to the United States, trading at 13 times earnings. The U.S. is close to 18 times”.