Equity markets started the year positively. Further evidence of slowing inflation as well as supportive positioning led to a rally in risk assets.
The expected economic recession is one of the most anticipated in history. Given the economic backdrop we continue to be focused on those areas of the market where valuations are most supportive. The UK is out of favour, with the IMF the latest organisation to highlight its frailties.
Many of these issues, though, are not unique to the UK. Investors should internalise that stock prices are a discounting mechanism. The UK equity market has been particularly unloved with both international and domestic investors since Brexit and valuations reflect a period of lower growth. Economic forecasting, however, is exceptionally difficult.
Economies are complex systems where feedback loops amplify changes in behaviour but high employment and robust private sector balance sheets should reduce the likelihood of severe outcomes. Furthermore, new research suggests tighter monetary policy may impact economies quicker than previously anticipated.
In the aftermath of the financial crisis investors who ignored cheap valuations and waited for economies to turn missed out on significant returns.
