The great equity market rotation

For investors in the UK equity market, the implications of this will be significant in shaping their portfolios and determining the returns that can be achieved.

Despite the international spread of UK-listed companies, the prospects for the domestic economy is of huge relevance to vast swathes of the UK equity market. The outlook on this front has been severely clouded by the prospect of the UK leaving the EU.

Given the impact the Brexit decision has had on factors such as the value of sterling, business confidence, and input cost pressures, coupled with the recovery in the oil price, it is very easy to paint a bearish outlook for the UK-facing sectors including retail, housebuilders and leisure.

In the absence of meaningful salary increases, the inflationary backdrop is likely to put significant pressure on real wage growth and disposable incomes.

However, for now the UK consumer is continuing to resort to credit to offset these headwinds and is seemingly utilising low interest rates and plentiful liquidity in order to maintain previous levels of spending.

Indeed in their latest Inflation Report, the Bank of England forecast the UK savings ratio falling to levels never seen in history as the basis for their upgrade to GDP growth forecasts.

Given the extent to which many domestic sectors have been de-rated since the referendum result in June, it is possible that this may throw up some interesting valuation opportunities for those willing to search among the rubble of the domestic-facing sectors.

Clearly what happens internationally is a key driver of UK equity returns given the majority of domestic market earnings are derived from overseas.