A manager of the £510 million Abrdn UK Smaller Companies Trust plc has said that UK markets may be “closer to their low point than other regions and could recover more quickly.”
Abby Glennie wrote in an outlook: “Having derated significantly in recent months, UK valuations are currently at appealing levels relative to other regions, and the UK’s small- and mid-cap sector looks particularly attractive in comparison to large-cap holdings.
“The significant divergence seen over most of 2022 has been driven by the strong sector focus in the FTSE 100 Index combined with general risk-off sentiment.
“However, towards the end of the year, the market tested some of these levels and we saw a strong bounce in UK small- and mid-cap stocks in October and November.
“We caveat this view with some macroeconomic caution. We are still seeing many challenges including high inflation, squeezed consumer spending and uncertainty over trade with China.
“We were not surprised to see markets fall back in December, and believe volatility may continue before we see a more sustained recovery. The war in Ukraine remains an overhang for markets, particularly given its inflationary impacts.
“In the UK, we would typically not see the market recover until nearer the trough in earnings, which appears some way off.
“However, many aspects of this cycle have been very different and the UK did not enter it from a position of strength given Brexit sentiment and relatively low GDP growth over recent years.
“There are reasons, therefore, to believe UK markets are closer to their low point than other regions and could recover more quickly.”
Glennie wrote that in a recession Abrdn believes its “quality focus” in stocks will prove “relatively resilient.”
Glennie highlighted broad areas of downgrades across the market but “numerous areas of resilience” and strength in the Abrdn portfolio.
“Lastly, the derating of growth businesses seen through 2022 means many of our quality growth ratings are trading on significantly lower multiples than has historically been the case and have been taking part strongly in the recent market rally as a result,” Glennie said.
“This gives us some confidence over relative performance potential during a sustained recovery.
“At this early stage in the recession, we continue to believe many cheaper value cyclical businesses will experience earnings pressures over the short term.
“Given current dynamics, we would be surprised to see any market recovery being led by the most cyclical stocks.
“While 2023 is expected to be another uncertain year, we feel many of the most painful changes in market conditions are behind us.
“We would hope for a more settled environment, where stock focus returns to markets and share-price returns are less dependent on top-down macroeconomic factors.”
Other Abrdn fund managers, who invest in companies and securities around the world, have also written their views on prospects for markets in their regions.
Yoojeong Oh, investment director of the £450 million Abrdn Asian Income Fund Limited, wrote that “Asia is in a better position than developed economies in the West.”
Oh said Abrdn fund managers in Asia will continue to favour fundamental themes “like consumption, technology and green energy” which the firm believes will deliver positive results for shareholders over the long run.
Oh wrote: “China remains pivotal to Asia’s economic recovery, and with the country’s reopening we think this bodes well for the region’s prospects in 2023.
“We expect macroeconomic risks to persist, including geopolitical and inflation risks amid the ongoing Ukraine war, and a fragile world economy as recession looms in Europe and the US.
“That said, investors expect the US Federal Reserve’s monetary policy tightening cycle to come to an end. We believe that Asia is in a better position than developed economies in the West.
“China’s reopening could boost tourism revenues in ASEAN particularly, given the significant contribution of Chinese tourists’ dollars to these economies.
“Many economies, particularly those in South-East Asia, are still bouncing back after their post-Covid-19 reopening, which should support earnings growth.
“We believe Australia has a higher probability in achieving a soft landing, and in Singapore we see resilient conditions and a sustained re-opening underpinning domestic demand and corporate earnings, albeit accompanied by rising price pressures and interest rates.
“Meanwhile, valuations remain attractive. Against this backdrop, we have positioned the portfolio to weather near-term risks, while keeping in mind longterm secular trends across Asia.
“Our focus remains on quality companies with sustainable business models, strong cash flows and access to structural growth drivers across Asia, as these support growth in both capital and shareholder return.
“We continue to favour fundamental themes like consumption, technology and green energy, which we believe will deliver positive results for shareholders over the long run.”
James Thom, investment director of the £410 million Aberdeen New India Investment Trust plc, wrote that growth momentum India is expected to remain moderate in 2023, at least in the first half.
Thom wrote: “India remains one of the fastest growing countries in the world, supported by a relatively stable macroeconomic environment where government spending, revival in consumption and easing of supply chain bottlenecks is likely to partially offset headwinds from higher rates and a potential slowdown in the global economy.
“The government remains focused on capital expenditure and is expected to continue incentivising rural growth in the run-up to general elections in 2024.
“With Covid-19 under control, the domestic economy is showing signs of recovery: inflation pressures have somewhat eased in recent months, credit growth is accelerating, the real estate market is seeing momentum, infrastructure is being built and consumer spending is gradually improving.
“Activity data further indicate resilient upward momentum, building investor confidence in the strength of the domestic economy.
“On the other hand, India’s external balances remain precarious both in part due to relatively high energy prices – India is a net oil importer – and as a result of falling exports. The country faces external headwinds, including a potential recession in the global economy.
“As a result, growth momentum is expected to remain moderate in 2023, at least in the first half.
“That said, we expect our core quality holdings to continue to deliver resilient compounding earnings growth over the medium term, come what may in terms of macro conditions.
“The consistency of earnings growth of the portfolio remains healthy and fundamentals, including pricing power, strong balance sheets and the ability to sustain margins, remain solid, and we maintain confidence in the experienced management teams of these companies.
“In time, we expect these to once again be reflected in share price performance.”
Fran Radano, senior investment manager of the £480 million North American Income Trust plc, wrote that Abrdn expects that the US economy will enter a downturn in the middle of this year.
Radanon wrote that there “could be another sell-off in equity markets in the future as 2023 earnings expectations get adjusted.”
The North American Income Trust looks to provide investors with above average dividend income and long term capital growth through active management of a portfolio consisting predominantly of S&P 500 US equities.
Radano wrote: “The Fed accompanied its latest rate hike at the start of December with a slightly less hawkish message around future policy, a near-term positive for equity markets.
“Indeed, a majority of policymakers are now forecasting an easing in the pace of future rate hikes once inflation has been brought back under control. However, the Fed remains determined to tame inflation, even if this comes at the cost of a recession.
“The upshot is our arbdn Research Institute now expects further tightening over the coming months as policy remains restrictive, adding to our conviction that the economy will enter a downturn in the middle of this year.
“So, what does this mean for equity markets going forward? Despite the recent uptick in markets, sentiment has remained under pressure due to Fed commentary and further negative macroeconomic readings, with equity levels still materially lower than their recent peak.
“The economic outlook, both in the US and abroad, remains challenging and earnings downgrades have continued to come through since the end of the third-quarter earnings season.
“Nonetheless, US equity levels now appear to have priced in a strong probability of slowing economic growth, if not a recession.
“Although there could be another sell-off in equity markets in the future as 2023 earnings expectations get adjusted, history shows that they have often hit a low point and begun to recover prior to GDP bottoming out (i.e. before the end of a recession).
“Indeed, we are now seeing some increasingly appealing valuation points for opportunistic, long-term investors like ourselves and have, therefore, become somewhat more constructive on equities as an asset class.”