Overseas equities rallied but investor activity in property market slowed, UK finance assessment suggests

News - Banking

Written by Ray Clancy

Tuesday, 17 August 2010 10:19

Overseas equities rallied during July but underperformed the UK market as investor activity slowed in the property market due to a lack of prime stock, according to the latest analysis.

Financials also performed well as investors anticipated strong results from the UK banking sector, says Matthew Bennett, head of international equities at insurance, pensions and investments specialist NFU Mutual.

In his latest assessment he points out that UK equities advanced in July, with the FTSE 100 and FTSE All-Share returning 7.1% and 6.9% respectively. BP led the UK market higher, bouncing 27.3%, as it made significant progress towards capping the Gulf of Mexico oil leak and sold some non-core assets.

‘Overseas equities rallied in July, but underperformed the UK market due to the strength of sterling. Investors, who instead focused on a strong quarter two corporate reporting season, largely ignored weak macro economic data in the US. To date over 65% of US corporates have beaten analyst profit estimates,’ he said.

He believes that the stress tests in Europe helped. ‘Within Europe 91 banks were subject to balance sheet stress tests. Only seven banks were deemed to require additional capital, which was a better outcome than investors expected,’ he explained.

‘Gilts fell marginally over the month as money flowed into risky assets. Yields in the UK, Europe, USA and Japan remain at low levels and consensus forecasts predict interest rates will not rise in the near future. We believe the current shape of the yield curve makes longer dated bonds look attractive relative to short dated issues. Corporate credit spreads tightened across the spectrum in July,’ said Bennett.

But the property market has seen prime yield compression level out, causing the prime versus secondary yield gap to increase further. ‘Investor activity has slowed due to a lack of supply of prime stock, but it appears investors do still have cash allocations to put to work. Rental forecasts for 2010 remain negative, but with prime space becoming limited in some areas there should eventually be a consequent rise in rental values,’ added Bennett.

During July, and the beginning of August, the NFU Mutual Investment Team increased its bias towards emerging market equity investments. ‘Government finances in the developing world are healthy, the consumer is arguably under levered and company earnings are forecast to grow strongly in the near term,’ he explained.

‘In the longer term we believe it is likely the developing world will command an ever bigger share of global GDP and stock market capitalisation. The number of BRIC households with discretionary income above $10,000 now exceeds the US and generally credit penetration is low and has room to rise. On top of this, valuation measures suggest developing market equities are trading at levels consistent with good forward returns,’ he concluded in his report.