The latest projections by OPEC show an expectation for re-balancing by year-end, although this will be worthy of continued investigation. It is important to remember many of the world’s economies were in “a state of emergency”, such as Venezuela and to a lesser extent Russia, early this year and they will be relying on increasing the supply of oil to extract themselves from the pit.

This is a fast-moving series of events, and OPEC will be centre stage. There is an informal meeting next month involving OPEC and Russia which may provide more clarity, however in the meantime investors must acknowledge the importance of oil and the difficulty to predict it.

European stocks look attractively priced. This is a contrarian judgement supported by material drops in financials, pound sterling and the euro which combine well with supportive valuations. Continuing the contrarian bent, we see intriguing long-term opportunities forming in many unloved markets, including many of the emerging markets in Europe. For instance, there appears to be long-term opportunity in countries such as Greece, Russia, Turkey and the Czech Republic, all of which are well represented in the emerging market Europe index.

It should be noted that any investment is this space requires a thorough assessment of risk amid rising geopolitical constraints. Therefore, while it is a theme growing in attractiveness, the risk-adjusted returns may not be suitable for all risk profiles – and should only ever make up a very small part of a well-diversified portfolio. This illustrates an important point to remember: the areas of greatest opportunity tend to come with the greatest sense of discomfort.

Financial Stocks Look Attractive

At a sector level, European financials ex-Italy continue to gain in attractiveness on a long-term view, especially following the broad-based banking malaise post Brexit. However, this is not just a Brexit story, as financials in Japan are down 35% over one-year and US financials down around 1%. In Europe and the United States for example, financials appear to be one of the few sectors that have not excessively exceeded their fair-value estimate. Of course, value is only a part of the story and low interest rates will not help bank profitability in the medium-term.

With these considerations in mind, the key question becomes what to do. More specifically, what does this backdrop mean for dividends, earnings and valuations? The expected sector returns on a global scale continue to show significant variability. We see long-term opportunities in sectors such as financials and healthcare, whilst we retain a healthy amount of cynicism for over-heated sectors such as information technology and consumer discretionary stocks.

Sterling Drops in Value

In its current form, the pound sterling is a very difficult asset to judge. While a decline in sterling following the ‘leave’ vote in the Brexit referendum could have been anticipated, the lack of support thereafter has been more surprising. Over recent weeks, investments denominated in GBP will be very pleased to see strong returns, however these can’t be guaranteed going forward.

It is worth making the point here that while sentiment is likely to dominate in the short term, sterling appears cheap and is therefore likely to rise in value over the longer term. One remarkable point is the amount of attention from the wider public. Maybe it is the political theatrics, or maybe it is the time of year, however the amount of public interest in the pound sterling has hit a record high. In fact, the pound sterling continues to see gradual weakness amid the economic uncertainty and one cannot be sure how deep this contraction could go. Even HSBC are now claiming it could fall to parity with the euro, although we warn that history provides no basis for these types of claims.

Regardless of the short-term direction, the recent pound sterling and euro weakness are likely to be possible benefactors to these economies. We will be keeping a close eye on a number of key economic metrics to help guide our view; including manufacturing surveys, central bank activity, inflation readings, property prices and household consumption to name just a few.

As we see the equities world currently, the economic progress of over the past seven years has caused a significant and unsustainable deviation in valuations. This is no clearer than in the United States. To put this in perspective, since the crisis the total size of the United States economy increase 28.6% while the stock-market has grown 196.5%. The US market suffers from high prices in many sectors, typically due to a combination of abnormally low dividend yields and unsupportive profit margins. The fresh record high in the NASDAQ, Dow Jones and S&P500 for the first time since 1999 do not help.

The well-versed analogy, “if the United States sneezes, the rest of the world catch a cold” is an overused term but admittedly something everybody should consider for portfolio construction. To our judgement, there is a reasonably clear case for United States underperformance. If you aren’t considering holding an underweight position to United States equities now, what catalyst would be required before you did decide to reduce your exposure? And we would prefer to see greater caution among the investing public.

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