Along with slowing growth in China and the continued weakness in commodities, the focus is turning to higher discount rates in 2016, at least in the US, says Columbia Threadneedle's Chris Kinder.
The current economic backdrop in the UK seems to be neither too hot nor too cold to cause much of a worry for domestically-exposed companies for the moment. Consumer confidence is increasing and unemployment is falling, which has led to wage growth moving ahead of inflation.
However, there are some clear warning signs ahead. Along with slowing growth in China and the continued weakness in commodities, the focus is turning to higher discount rates in 2016, at least in the US.
In addition, the UK's current-account deficit remains elevated, and inward investment in the UK has not been strong enough to act as a counterbalance.
This is not yet causing a problem for sterling, but it may well weaken in 2016 when the European Central Bank's quantitative-easing programme could finish and the UK moves closer to its referendum on EU membership.
We would also note the strong UK economic recovery has not gone unnoticed by markets, with strong performance from the domestically-exposed stocks.
As naturally contrarian investors, this makes us extremely uncomfortable, and having been major beneficiaries of much of this performance through our holdings in property companies, housebuilders, media and others, we have been reducing exposure when the bottom-up conditions of valuation, sentiment and performance are appropriate.
The M&A boom remains firmly intact, aided by the relative ease with which deals can be done in the UK. We expect M&A to continue as there are many excellent UK businesses where the value available to an acquirer is meaningfully in excess of the value being attributed to them in the market.
Figures from Deloitte highlight that UK companies contributed some £186bn to the global M&A total for the first three quarters of 2015, representing an increase of 58% on the same period last year.
The outlook is challenging, but importantly, markets have stabilised since the gyrations seen in late August.
Chris Kinder is manager of the Threadneedle UK fund
• Volatility has eased since the gyrations seen in markets in August
• Valuations of some domestic stocks are elevated
However, there are some clear warning signs ahead. Along with slowing growth in China and the continued weakness in commodities, the focus is turning to higher discount rates in 2016, at least in the US.
In addition, the UK's current-account deficit remains elevated, and inward investment in the UK has not been strong enough to act as a counterbalance.
This is not yet causing a problem for sterling, but it may well weaken in 2016 when the European Central Bank's quantitative-easing programme could finish and the UK moves closer to its referendum on EU membership.
We would also note the strong UK economic recovery has not gone unnoticed by markets, with strong performance from the domestically-exposed stocks.
As naturally contrarian investors, this makes us extremely uncomfortable, and having been major beneficiaries of much of this performance through our holdings in property companies, housebuilders, media and others, we have been reducing exposure when the bottom-up conditions of valuation, sentiment and performance are appropriate.
The M&A boom remains firmly intact, aided by the relative ease with which deals can be done in the UK. We expect M&A to continue as there are many excellent UK businesses where the value available to an acquirer is meaningfully in excess of the value being attributed to them in the market.
Figures from Deloitte highlight that UK companies contributed some £186bn to the global M&A total for the first three quarters of 2015, representing an increase of 58% on the same period last year.
The outlook is challenging, but importantly, markets have stabilised since the gyrations seen in late August.
Chris Kinder is manager of the Threadneedle UK fund
Bull Points
• M&A boom is ongoing and the UK is open for business• Volatility has eased since the gyrations seen in markets in August
Bear Points
• UK economic growth remains lopsided with large current account balance, and Brexit talk is building• Valuations of some domestic stocks are elevated
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