Outlook for the UK equities market

As we run an evidence-based investment strategy for clients, we believe that the sum of all global capital flows should determine client geographical allocations. UK equities currently make up around 3.8% of the FTSE All world index. Hence this is also our preferred allocation for the equity portion of client portfolios.
Any increase to this weighting means that we are making an active bet that the UK market will outperform the rest of the world. We don't believe we have enough of an edge to make this call and we would argue that the evidence suggests nobody else does either.

The outlook for the FTSE 100 will be largely dependent on two main themes — how well the UK economic landscape plays out, especially with inflation, and how China navigates through its current economic malaise. This is because the bulk of FTSE 100 companies derive their profits from China and overseas, especially miners.

However, the good news is that UK shares are currently trading at their biggest discounts in over a decade. Thus, much of the downside risks including a potential shallow recession have already been priced into many names. As such, it's been no surprise to see numerous banks and retailers trading below their book values and sales.

Therefore, any meaningful moves towards the upside will require a perfect combination of falling inflation, a peak in the bank rate, as well as a pickup in the Chinese economy on the construction front. But considering the risk/reward proposition, UK shares look to be as good of value as they've been in years.

Our opinion on UK equities is that they present a good medium to long-term outlook, barring the fact that the next global crisis isn't queuing up waiting in the wings.