RWC Partners’ Innes: Does growing global optimism mark the start of the next stage of the UK bull market?

UK equities could enter the “next stage” of the bull market over the next few years as optimism towards synchronised global growth and monetary normalisation returns, says RWC Partners’ John Innes.
Since bottoming in early 2009, markets have been on a largely upward trajectory thanks to a combination of loose monetary policy and recovering economic data.
According to Innes, manager of the RWC UK Focus Fund, these “initial stages” of the bull market – powered by low bond yields – could now be moving on to a more optimistic stage powered by synchronised global growth and monetary policy normalisation.
“In many ways the politics of austerity have reached their democratic limits,” he says.
Instead of supportive central banks pushing yields to record lows, Innes says it is now the turn of companies to display earnings growth, also helped by increases in fiscal spending which should spur higher global GDP.
“Looking into 2017, the macro indicators are looking more positive,” he says. “Global growth is coming through stronger-than-expected and this could continue for some time.  Although the economic cycle is mature in terms of time it is not so in terms of scale.” If corporates are able to take up the baton from central banks, Innes argues equity markets could climb much higher. “The next few years might see the next phase of the bull market for equities in this cycle as nominal earnings growth takes over from lower bond yields as the key market driver,” he says.
In terms of how high the market could go, Innes believes that while current valuations could appear to be advanced on some measures, relative to other asset classes such as bonds and cash, UK equities were still “generationally cheap”.
“If it is to be believed that there are enough areas of potential growth for companies to exploit, then the scope for material progress in the equity markets in a period of extended prosperity could equal past bull markets, especially given the relative valuation starting point,” he says.
In terms of areas where Innes is currently finding opportunities, his fund is invested in companies which have worked hard to improve themselves during the tougher period and which should benefit accordingly when growth returns.
The fund’s biggest overweight is to travel and leisure, including stocks such as Carnival Cruises, while it also favours banks and insurers such as Lloyds, Barclays and Prudential.
Over the last three years, the UK Focus Fund has delivered a return of 32.1% versus the IA UK All Companies sector average of 23.2%.[1]
[1] The RWC UK Focus Fund has returned 32.1% over the last three years to 21/03/17 versus the sector average return of 23.2%, according to FE Trustnet data.