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UK equity markets resilient in 2014

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Despite ongoing concerns over domestic politics and international geopolitics, UK equity markets have performed reasonably in 2014, according to Mark Martin, Head of UK Equities and Manager of the Neptune UK Mid Cap Fund.

Economic activity continued to be stimulated by accommodative policy from both central banks and political bodies. This has aided the progressive repair of economies affected by the financial crisis and supported the improving outlook for global growth. In addition, despite no longer appearing cheap in absolute terms, equities remained attractive relative to other asset classes. From a currency perspective, the pound sterling performed poorly on a trade-weighted basis. The strength of the US dollar accounted for much of this weakness: versus the euro, sterling was in fact a strong performer.
 
Despite aggressive monetary policy around the world, inflation is currently well contained. Indeed, in many parts of the world deflationary forces continue to assert themselves. The current oil price – below $80 per barrel at the time of writing – is evidence of highly constrained inflation. Although a negative for commodity-producing countries, the UK consumer is a major beneficiary of low energy prices.  Low energy prices not only reduce fuel and heating bills but also the threat of interest rate rises – and hence the threat of rising mortgage payments. Unsurprisingly, the metals and mining sector was weak, as was the oil and gas sector. Areas of the market that performed strongly included general retailers, such as Next, as well as the healthcare sector, which benefited from M&A speculation. Given the resource-heavy nature of the FTSE 100, it was perhaps surprising, that it outperformed the more domestically-focused FTSE 250 and Small Cap indices.
 
Whereas the latter stages of 2013 and the first half of 2014 saw investors bringing forward their expectations of interest rate rises in the UK, the second half of 2014 saw a sharp reversal of this dynamic. This resulted in a shift back towards the more domestically-orientated and cyclical parts of the market.

The outcome of the forthcoming general election is highly uncertain. We do worry that political mavericks such as Ukip could lead to some instability that could potentially render this a political market.
 
UK equities are a relatively attractive option versus gilts and bonds: Despite the political uncertainty, we believe selective UK equities can make progress. Although absolute valuations have increased markedly over recent years, we believe parts of the UK equity market remain attractive relative to many other asset classes. Ongoing de-leveraging continues to be a headwind for Western economies, and companies with structural growth opportunities are likely to be increasingly sought out.
 
Wide range of potential outcomes from global monetary policy experiment: The ability of the US economy to withstand a tighter monetary policy environment will be important for 2015 equity returns – as will the ability of Europe to avoid a deflationary shock.  In both cases, we are optimistic. Tighter monetary policy in the US may cause volatility but ultimately represents economic recovery and therefore should benefit the UK equity market. Where the strength of sterling was a headwind for UK exporters for much of 2014, recent weakness should be a tailwind for much of 2015. We expect the UK stockmarket to make progress in 2015, although we continue to advocate a balanced, diversified approach.
 
As usual, we focus on attractively valued companies that we believe are set to benefit from structural growth trends or a significant level of internal self-help or management change. In the absence of organic growth opportunities, well-funded companies may look to return excess cash to shareholders, or engage in M&A to grow sales and profits. Pfizer’s approach for AstraZeneca, as well as several lower profile deals, bears witness to the renewed corporate appetite for M&A.

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