Published : 8 years ago, on 05/05/2017

By Michelle McGrade, chief investment officer, TD Direct Investing

Given that it has been more than a month from the date Article 50 was triggered and the two front runners in the French presidential race are confirmed, just how well are UK markets doing and how are global ones faring in a time of such regular change?

Time for a bit of sense and sensibility

As we got closer to Article 50 being triggered, investors were becoming a little more confident about what Brexit could mean for their investments. Over a three-week period, concluding the same week Theresa May finally penned her letter to President Tusk, the number of our customers who didn’t know whether the decision would be positive for their investments dropped from 44% to 35%, suggesting that investors were initially a bit spooked by the uncertainty, but as things became clearer, their sentiment became more positive.

UK equity market valuations look attractive

That is if we look at price to earnings (P/E) ratio (this measures the market price of a company’s stock relative to its corporate earnings). The below chart represents equity market valuations of five geographical regions based on P/E ratios. We can see that the FTSE All-Share index is priced just above MSCI Asia and MSCI Emerging Markets, both of which are considered attractive right now.

Past performance is not a reliable indicator of future returns.
Source: Bloomberg to 31 March 2017

So did global markets reflect this positivity as well?

The US market looks a bit stretched

Using the same chart from above, it clearly shows that US equity market valuations are looking a little stretched. This trend is mirrored in the below chart looking at price-to-book (P/B) ratio (which measures a company’s market price in relation to its book value); again using the same five geographical regions.

Past performance is not a reliable indicator of future returns.
Source: Bloomberg to 31 March 2017

Does this mean that the US bull run is about to come to an end?

The equity bull market is entering its eighth year, and for US stocks this is the second longest bull market since WWII (the longest having been between 1987 and 2000).

The current bull market is different from the 1987-2000 period, in that interest rates have fallen throughout. Bond yields have also declined to historically low levels, as demonstrated in the next chart. The major concern this time is that the majority of recent equity returns have been driven by investors bidding up prices in a global hunt for yield while earnings have remained flat. This might also have something to do with the way investors react to volatility; different to how they have done so historically.

Past performance is not a reliable indicator of future returns.
Source: Bloomberg to 31 March 2017

What is the VIX telling us?

The Volatility Index (VIX) (market sentiment indicator) remains at depressed levels. The chart shows that the opposite trend between S&P 500 and VIX has reached an extreme level: 2364 vs 12.

Historically, spikes in the VIX coincide with sharp drops in the S&P 500 but as the chart demonstrates, huge spikes are a rarity in the last five or so years.

Past performance is not a reliable indicator of future returns.
Source: Bloomberg to 31 March 2017

What can we deduce from this?

The data shows market valuations are stretched in some geographical regions. This comes against a backdrop of the potential threat of rising interest rates and occasional volatility, triggered by events like Brexit.

Despite the fallout from Brexit and upcoming elections in France and Germany, the outlook for global equities over the medium term remains cautiously optimistic. With global economic indicators strengthening and earnings picking up, global equities could deliver modest returns but with higher volatility. Additionally, there is the prospect the new US administration will push through pro-growth policies that are likely to provide a substantial boost to corporate earnings, but these are yet to be confirmed.

Despite high valuations of US equities, they are still attractive to hold due to the high-quality nature of the US market. The longer-term outlook on emerging markets looks potentially positive as they are cheaper than developed markets.

So, what 10 things should investors do as Britain secures its long-term future?

1. Have a clear investment strategy

Martin Cholwill, fund manager of the Royal London Equity Income, recommends that investors go for ‘dull and reliable’ instead of being dazzled by what seems ‘exciting’. Richard Buxton, fund manager of Old Mutual UK Alpha, agrees that having a clear investment strategy is important. He said: “The key to unlocking any investment reward is to have a high conviction approach and a fair bit of patience.”

2. Invest for growth

If you’re investing for growth, it’s normally recommended that you think about a minimum time horizon of five years or more.

3. Invest for income

If you’re looking for income, consider funds which invest in high-quality companies which are backed by cash flows, giving them the ability to pay dividends out of cash reserves.

4. Stay calm & stay invested

Remember: it’s about time in the market, not timing it! Use regular investing to take the emotion out of investing and not over-commit. Should any opportunities arise, you’ll also be well-positioned to take advantage of them.

5. Run your winners

It’s difficult to do, but the aim should be to buy at, or close to, the bottom and sell at the top. Run your winners. This basically means holding on to your investments that have done well, although it can be a good approach to take some profits – known as ‘top slicing’.

6. Cut your losses

Don’t be afraid to cut your losses if an investment is clearly not going to gain in value. But remember, you only crystallise a loss if you sell, so if you think the value will rise again, hold your nerve and stay invested.

7. Don’t get trigger-happy

The most skilled fund managers don’t expect instant success. When we asked our Best of British fund managers how long they typically held onto stocks for, the average period was three to five years. See what stocks the Best of British Fund Managers are holding most.

8. Don’t believe the hype

Investors stand to benefit from not buying into the hype around particular shares or sectors, and to stick to their guns and invest regularly. Investors’ tendency to follow performance, which frequently sees them buy at the top of the market and sell at the bottom, can be painful and costly.

9. Back the Best of British

You can’t ignore a solid track record. Our Best of British Fund Managers list contains some core fund managers who have been there and done it through market ups and downs, riding out difficult times to deliver long-term outperformance.

10. Embrace opportunities

Take your time, think about your long-term investment goals, but embrace any opportunities that arise.