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Global markets watch
Matt Brennan
Scottish Widows Head of Asset Allocation and Market Insights
Matt Brennan shares his latest views on the outlook for equities and bonds, and the opportunities and risks investors should be watching out for.
Equities
Globally, equities delivered further gains in the third quarter, helped by stronger performance from companies that investors viewed as offering better value. Despite this, global equity market concentration remains a concern given the heavy skew towards US technology giants. Against a backdrop of relatively high valuations, uncertainty around interest rates and the potential for further geopolitical instability, we believe volatility could return in the near term.
In our view, it remains important to have a spread of investments across different regions and, while equities continue to be the main driver of long-term growth, we currently see bonds as offering relatively more attractive opportunities.
Long-term view: Negative outlook (-)
- UK equities
The UK equity market's limited exposure to the technology sector has been one factor holding it back in recent years. Despite strong gains so far this year, the market has lagged the rise in global equities. As investors have looked beyond large technology stocks during the third quarter, the UK market has slightly outpaced global equities, helped by the greater domestic focus of many UK mid-sized companies. Attractive valuations, exposure to a broad range of sectors and revenues generated from around the world all support our relatively positive long-term view.
Long-term view: Positive outlook (+) - US equities
US equities remain relatively expensive, with market performance still heavily driven by growth-related sectors. The risks around the significant spending plans of AI-related companies are likely to be a key focus in the coming quarters. Following September's interest rate rise, inflation and interest rate expectations may become more important drivers of markets again. Looking further ahead, we believe diversification across other regions could prove beneficial, as future returns from the US may become relatively less attractive over the longer term.
Long-term view: Very negative outlook (--) - Europe (ex-UK) equities
Interest rates in Europe have been increased twice this year with the aim of tackling inflation. While valuations appear attractive, this is offset by Europe's exposure to geopolitical risks and its relatively modest economic growth outlook over both the short term and longer term.
Long-term view: Negative outlook (-) - Japanese equities
In the near term, Japan's strong corporate earnings and distinct economic backdrop may be offset by currency volatility and the gradual normalisation of monetary policy. Over the longer term, ongoing corporate and market reforms could support Japanese equities, although lower economic and earnings growth prospects may limit some of that benefit.
Long-term view: Neutral outlook (=) - Asia Pacific (ex-Japan) equities
The market appears slightly expensive, although this is broadly offset by the potential for strong earnings growth over the longer term. At the country level, Australia, Hong Kong, Singapore and New Zealand continue to offer attractive income opportunities and remain appealing as part of a diversified global equity portfolio.
Long-term view: Neutral outlook (=) - Emerging Market equities
Valuations remain relatively attractive in our view, although we continue to monitor volatility in markets benefiting from strong demand for semiconductors and other AI-related technology. Strong long-term economic growth potential, favourable demographics and structural advantages, including generally lower debt levels, continue to make emerging markets attractive from a long-term investment perspective.
Long-term view: Positive outlook (+)
Bonds
Recent weakness across much of the bond market has continued to create opportunities and supports our positive long-term view of fixed income. Income levels from higher-quality corporate bonds are particularly attractive. We believe a diversified blend of government and corporate bonds, across different regions and with different characteristics, can continue to provide valuable income and diversification benefits within portfolios.
Long-term view: Positive outlook (+)
- Government Bonds
Despite increasingly attractive yields and improved long-term return potential, we currently prefer other areas of the bond market. Yields have risen over the last quarter due to concerns around inflation, government borrowing and high levels of bond issuance. Overall, we favour maintaining a mix of government bonds, with a modest preference for UK gilts.
Long-term view: Negative outlook (-) - Investment Grade Corporate Bonds
Yields on investment grade corporate bonds rose during the third quarter. Alongside concerns about inflation, increased borrowing linked to AI-related investment and data-centre expansion has created greater competition for investors' capital. This volatility could continue in the short term. However, over the longer term, we believe investment grade bonds continue to offer attractive income and could outperform government bonds. Within this area, we broadly favour sterling corporate bonds over global peers.
Long-term view: Positive outlook (+) - Global High Yield Bonds
High yield bonds weakened in recent months but still performed better than investment grade and government bonds. Their stronger performance may limit short-term return potential if market volatility persists. Over the longer term, however, high yield bonds can offer attractive levels of income and are generally less sensitive to movements in interest rates.
Long-term view: Neutral outlook (=) - Emerging Market Debt
The attractive income available from emerging market debt remains intact despite weakness during the third quarter. Over the longer term, the asset class is supported by economic growth, diversification benefits and potentially favourable currency trends. We prefer broad exposure across both US dollar and local-currency emerging market debt, while continuing to monitor individual market risks closely.
Long-term view: Neutral outlook (=)
Alternatives
We believe alternative investments can play an important role in diversified portfolios by providing exposure to assets that may behave differently from shares and bonds.
These investments can offer a combination of inflation protection, income and long-term growth potential.
Long-term view: Neutral outlook (=)
- Global Listed Property
Listed property investments, such as real estate investment trusts (REITs), can provide attractive income, some protection against inflation and exposure to a wide range of property markets. The sector is currently supported by relatively attractive valuations. However, property investments remain sensitive to interest rate movements, which may continue to create periods of volatility while central banks maintain tighter monetary policy.
Long-term view: Neutral outlook (=)