From the UK’s perspective, domestic market conditions appear somewhat choppy. While other equity markets are making all-time highs, led by the S&P 500 in the US, here the FTSE 100 continues to look to break from its recent range (its all-time high was back in May ’17). The main cause of this lag has been the rebound in sterling from previous lows, which has lowered the value in pounds, shillings and pence of overseas earnings – which comprise more than 70% of the profits of UK-listed shares.
This rebound looks fragile to us. The chaos surrounding the UK government’s Brexit negotiations, the weakness of the Conservative Party’s minority administration and the continuing twin trade and fiscal deficits are all likely to weigh on sterling in the medium-term, let alone the implications on the UK economy caused by uncertainty around Brexit. We’re not inclined to add further to UK assets, where we’ve been underweight for a considerable time. In fact, if anything, we may use the UK as a further source of cash on a tactical basis as we see a pull-back in European or emerging markets.
But outside the UK, the global economy is moving ahead nicely. Growth in the US continues at a steady pace, despite the lack of stimulus from President Trump’s stumbling agenda. In Europe nearly all indicators now look positive, even in previously laggard economies such as Italy. Chinese growth is also moving ahead in-line with expectations, with latest data looking positive. This comes despite recent moves there to tighten monetary conditions and curb bubbles in the housing and shadow banking sectors. With the three major regions of the world moving ahead in a synchronised fashion, it’s no surprise that data from Japan is also reasonable, and that emerging market economies are performing well too, in the main.
We have commented before that this growth – not too hot and not too cold – is akin to a Goldilocks scenario. Benign inflation data, which keeps the lid on interest rate rises, and only very gradual tapering of quantitative easing and central bank balance sheets, means ample liquidity for asset markets, and nearly double digit company earnings growth across the globe. In turn this means that equity valuations, while on the high side especially in the US, can be sustained for the time being in our view. We would look to add further to equities on any meaningful pull-back, although we don’t expect anything too severe. Our preferred markets for this at the moment would be in Europe and emerging markets, where valuations make the most sense to us.
We remain unexcited by government bonds, which yield too little to attract us. Corporate bonds have some attractions compared with governments, and we’re carefully selecting strategic bond fund managers we think can extract the maximum risk adjusted returns across the fixed income spectrum for our clients.
In the meantime, we’re deploying some cash into what we view as secure alternative assets, where modest returns and relatively low volatility look attractive to us.
We’ve enjoyed a steady year so far for investment returns, and with high valuations we wouldn’t expect the scale of future gains to be spectacular from here. However, by the same token we struggle to identify a catalyst that might prompt a sharp deterioration in outlook at the moment, even if we remain vigilant in searching for one. For now, we want to continue to participate in gently rising markets.
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