According to the Financial Conduct Authority, over 40% of UK adults have savings of more than £10,000. This is reassuring but it seems a great deal of it is not invested.
Indeed, Barclays Bank estimates that 13 million UK adults hold £430bn in cash deposits.
Cash can be a good place to park savings for the short term, as the returns are not subject to the volatility experienced by investment markets. However, extending the time savings are kept in cash and not investing in asset classes like equities and bonds means potentially missing out on generating real returns to enable spending power to exceed the rate of inflation over the long term.
The gap between cash and investing is exacerbated at the moment by the fact interest rates have started falling, and we believe stock markets in the UK and internationally are offering attractive valuations.
There is hope the Budget on 30 October will deliver the catalysts required for investors in UK-listed companies to realise their attractive valuation opportunities
This latter point may seem surprising given the fact the US S&P500 index reached yet another new all-time high at the end of September.
Yet it is important to remember the US stock market has been driven to current levels in large part by a handful of mega caps, including Nvidia and Apple, which have benefited from the fever-like excitement around AI.
The market environment is changing, however. Revenues that have been delivered by US mega and large caps are spreading beyond these stocks, not only in the US but also in international markets. This is at a time when cheaper valuations are available outside large caps.
Our optimism about the outlook and valuations is demonstrated by the fact our team currently has a tactical score of four out of a maximum of five for equity markets in general. But not all equity markets are equal, and some offer greater value than others.
For the last time we saw this concentration in the S&P500, you have to go back to the Great Depression
The table below shows that, on a price to earnings (PE) and price to book (PB) basis, the UK offers the most value, with ratios of 12.2 and 1.9 respectively.
Expectations were raised when the Labour government won a large electoral majority in the summer, with a commitment to economic growth. There is hope the Budget on 30 October will deliver the catalysts required for investors in UK-listed companies to realise their attractive valuation opportunities.
Valuations in global equity markets
| P/E | Est. P/E 1-year | P/B | Dividend yield | 10-year govt. bond | |
| UK (FTSE 100) | 12.2x | 12.4x | 1.9x | 3.8% | 4.0% |
| US (S&P 500) | 24.5x | 23.7x | 5.1x | 1.3% | 3.8% |
| Europe (Eurostoxx 50) | 14.0x | 14.3x | 2.1x | 3.2% | 2.1% (Bund) |
| Japan (Nikkei 225) | 22.8x | 21.1x | 2.0x | 1.8% | 0.8% |
| China (Shanghai Shenzen 300) | 16.1x | 14.7x | 1.7x | 2.5% | 2.1% |
| MSCI Emerging Markets | 16.0x | 14.0x | 1.9x | 2.5% | 7.1%* (JPM EMBI) |
Source: Bloomberg/Liontrust, 02 October 2024; *External (hard currency) debt
Over the last two to three years, China’s slowing economic growth and trade tensions with the US have weighed on emerging markets (EMs).
We believe there are several reasons why EMs may now be more attractive. China’s central bank recently announced a new wave of monetary stimulus and EMs could benefit from the relative appreciation of their own currencies versus a potentially weakening dollar following the US Federal Reserve’s recent half-point interest-rate cut.
EM countries tend to borrow in US dollars, so a weaker greenback makes it easier for them and their companies to service their debts.
Barclays Bank estimates that 13 million UK adults hold £430bn in cash deposits
While US-China relations remain complicated, the reorganisation of strategic supply chains could create new opportunities for EMs other than China.
Two of the most expensive markets are the US and Japan after enjoying strong performance over the past couple of years despite the pullback in early August. However, while we are neutral on US equities from a tactical view, we do have a positive score of four out of five for US smaller companies and are bullish on the Japanese market, including smaller companies.
The fact Japan is in an inflationary environment for the first time in a couple of decades should encourage more consumption and, together with an improving corporate picture after years of underperformance, gives us a positive view of the outlook for the stock market.
If, as we believe, the concentration in equity markets of the mega caps in the US lessens over time and revenues and share prices broaden beyond them, then it is important to consider what the relative impact will be on active managers and passive vehicles within portfolios.
We believe there are several reasons why EMs may now be more attractive
If you take the US, which is the biggest passive market, the top 10 holdings in the S&P index represent around a third of the whole index. For the last time we saw this concentration in the S&P500, according to one of our US fund managers, you have to go back to the Great Depression.
The market conditions back then were entirely different to what we have today and we do not believe all the growth comes from just a few stocks.
While passive vehicles have certainly helped us over the years in terms of a broader universe of options to use within portfolios, there is a big opportunity now for active management, particularly in mid and small caps, and for savings to work harder for investors than keeping them in cash.
John Husselbee is head of the Liontrust multi-asset team
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