Markets have regained their poise over the last few weeks as the effects of US and UK political uncertainty in investors’ minds have waned – at least for the time being. Bond yields have stayed low, despite the decision by the US Federal Reserve to raise interest rates by 0.25% and provide more details of their plans to scale down quantitative easing. Equities appear unfazed by Trump’s travails and the surprise UK general election result. All seems well as the summer sun shines.
Importantly, the global economic outlook is supporting this renewed poise. Although the US has slowed slightly, this is off good levels with very low unemployment and plenty of stronger data. In Europe activity is picking up, with the German economic engine now being joined by better growth from France. Certainly the election of Emmanuel Macron has helped, although now he’s in power with a strong majority, the hard work of reform and facing up to powerful vested interests begins.
It’s perhaps ironic that just as Brexit negotiations begin, confidence in the European project – and perhaps even its call for an ever-closer union – has grown stronger, not weaker. The Franco-German axis seems reinvigorated by Macron’s election successes. And the likely victory of Angela Merkel in Germany’s September parliamentary election would put the seal on this new sense of purpose.
The UK picture is less convincing. There’s the weakened Conservative minority government after Theresa May’s unsuccessful gamble at the ballot box, and divergent economic data make it uncertain as to whether the BoE will raise interest rates soon or not.
From our perspective, this isn’t necessarily bad news. Most UK-listed company earnings come from overseas anyway, and the prospect of lower interest rates here for longer will help support the bond market – even if UK growth disappoints.
Equity and bond valuations are high and it would be no surprise to see a pull-back at some point. However, we still believe that global fundamentals are supportive of risky assets like shares. And we’d see any such correction as an opportunity to add to interesting investments at better prices.
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