Employment too has grown, but, while at a headline level employment looks good, the persistently low wage inflation numbers and a tough October for the global economy has caused a number of investors to re-examine their views on the sustainability of that growth going into 2015.
Mark Barnett head of UK equities at Invesco Perpetual admitted in a note on Monday that he had been “overly pessimistic" about the outlook for employment, business investment and GDP growth twelve months ago.
But, he added, now: “The economy is okay – it’s neither too hot nor too cold – but, I think, the best days of the recovery probably are behind us and there could be a more moderate pace of economic growth going forward.”
Paul Niven, head of multi-asset investment at F&C agrees that the level of growth seen in the UK is likely to moderate.
“We continue to favour the US and Japan as economic data has surprised to the upside for the US and Japan has been helped by currency factors with the yen continuing to slide and policy remaining extremely supportive. UK growth has been strong but has most likely reached a peak and this is our biggest equity market underweight.”
Much of this change in view centres on the nature of the growth seen to date. As Barnett explains, the UK labour market effectively re-priced during the financial crisis, which allowed unemployment to remain low but wages to stagnate.
“Although jobs are being retained, people, in real terms, are being paid less, reflecting the current dominance of the employer over the employee.
At the same time, he points out, the consumption growth seen in recent years, has largely been boosted by a decline in the savings rate, which had been steadily increasing between 2007 and 2009.
And, while it is true that there has been an improvement in the consumption outlook in recent months, that has had more to do with lower food and fuel prices, than a significant jump in wages.
Indeed, as the ONS reported in August, that average wages had fallen 0.2% over the past year and only grown 0.6% when bonuses were removed from the calculations.
It is for these reasons that many eyes will be focused on the ONS on Wednesday, when it releases wage and employment numbers for the UK, and here too, opinions are mixed, with the consensus seeming that while employment will continue to grow, wage is likely to remain subdued.
But what about the stock valuations
According to Barnett, the UK equities market still looks attractive on s yield basis, but on a P:E basis, valuations are fair, bordering on expensive.
“It doesn’t necessarily indicate bad returns going forward, but suggests that returns will be more modest when compared to the last two or three years,” he said.
Woodford Investment Management also remains cautious about valuations across the market, pointing out in its October fund round up that: “From its recent peak on 4 September, the FTSE All Share Index had declined by -11.8% by 16 October, before staging a surprisingly rapid recovery towards the end of the month.
“Although the UK stock market appears well underpinned, particularly at the lower levels briefly visited during the middle of the month, we remain cautious about valuations across many parts of the market, and anticipate further volatility in the near term.”
