There has been no shortage of comment in the financial press about the unprecedented bull run in the US equity market, but UK equities have also been on a lengthy tear, although the economic justification for outperformance in either case is rather elusive – some might venture ‘illusory’. It is true, however, that in the case of UK equities, valuations aren’t quite so stretched as the benchmarks across the water, although that largely reflects the preponderance of highly rated ‘tech’ plays in US indices.
Trying to time markets is obviously a fool’s errand, but the orthodox view is that a major correction is unavoidable, given that liquidity will be withdrawn from the market now that the equity risk premium is narrowing – the only question is the rate at which this will take place. Traders are almost fully pricing in a rate hike at the US Federal Reserve’s next policy meeting in September.
Volatility returned to UK equity markets in the early part of this year, yet against this increasingly febrile backdrop the ‘real’ economy appears to be chugging along reasonably well. Manufacturers report that output growth and order books are both comfortably above their respective long-run averages, according to the latest industrial trends survey from the Confederation of British Industry (CBI). The overall level of output growth pulled back slightly in August compared with the two preceding months, although businesses expect volumes to grow at a similar clip over the next three months.
The CBI has consistently warned over the negative effects arising from a ‘disorderly’ exit from the European Union, although there’s little evidence to suggest we’re moving inexorably towards a cliff-edge. Lest we forget, 20 years ago, the CBI was urging the government to enter monetary union with our partners in the single market, as the euro would “give a stimulus to competition and productivity growth across Europe”.
