Raj Manon

We believe UK equities offer an interesting opportunity. The UK market has been out of favour with global investors since the Brexit vote. This negative sentiment has been further compounded by political uncertainty, the UK market’s bias towards defensive sectors and the relatively small number of technology companies listed in London.

Although the FTSE 100 is trading close to its all-time highs, UK equities remain inexpensive relative to global peers. The FTSE 100 is on a forward price/earnings multiple of just over 12 times, which is materially below the US market.

Rate cuts could provide a catalyst

We see several potential catalysts that could persuade global investors to take a fresh look at the UK, with one being interest rate cuts. We believe investors may be pricing in too few cuts by the Bank of England (BoE) in the months ahead.

After the US Federal Reserve’s September interest rate cut, investors are expecting at least one and possibly two more reductions this year. Inevitably, pressure will mount on the BoE to follow suit.

UK rates remain higher than most G7 peers and this gives the BoE greater scope to cut rates, once we have seen an easing of seasonal inflation effects, such as spikes in air fares and hotel prices.

Another potential catalyst is fiscal policy. When Chancellor Rachel Reeves provides greater clarity about the government’s tax and spending plans, we believe this could remove some uncertainty and benefit the UK equity market.

While we have trimmed our exposure a little after a strong run for UK equities, we continue to see potential in this market.

Strong US growth prospects

On the other side of the Atlantic, we continue to see strong long-term growth potential in US equities, which are still the largest equity component in our portfolios by a significant margin.

Valuations are higher, but one reason for this is the earnings growth achieved by US companies, many of which are world leaders and highly innovative businesses. The US leads the world in spending on research and development (R&D), investing around a trillion dollars a year, according to the R&D World website.

The return of Donald Trump to the White House caused considerable uncertainty, not least because of his trade tariff policies. However, the picture on tariffs seems clearer now and although Trump remains unpredictable, the overall political environment in the US appears more stable.

We expect measures by the president – including the extension of tax cuts, and new tax reliefs – to improve cash flows for US companies. We also see signs of artificial intelligence beginning to reward the huge investments poured into it.

Fixed interest

In fixed interest, while we continue to believe government bonds look attractive, we have trimmed our exposure. We have, for example, reduced our positions in longer-dated UK gilts, because of concerns about the impact of lingering inflation and questions marks about government tax and spending policy. We have selectively increased our exposure to global corporate bonds.

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