Market Update - June
UK top of the table...
Economic data in general has continued to show recovery and growth, with the UK leading the charge. The UK economy is gaining momentum and is likely to top the 2014 G7 growth league table. With this positive growth story comes risks of house price bubbles and subsequent ‘cooling’ strategies. The rhetoric from the governor of the Bank of England, although mixed seems to be designed to prepare markets for interest rate rises, which we expect to be modest and gradual over the next year
Not all emerging markets created equal...
Concerns over the Chinese economic slowdown have dominated headlines on emerging markets this year, and rightly so, as the macro-economic environment in China remains challenging. In contrast, look to India and you find an economy set for reform. The recent Indian election results have helped sentiment and boosted equity markets in the region in the expectation of the introduction of measures to contain inflation and strengthen growth.
Inflation or deflation... rate hikes or policy easing...
The dichotomy of US and European fortunes remain. Where the US recovery is later stage, Europe still struggles to create a unified recovery across the diverse and disparate member countries. Where US inflationary pressure is building and interest rate rises are on the horizon, Europe is trying to encourage economic recovery in the periphery with policy easing in the form of a negative deposit rate. However, positive growth signals are emerging from the Eurozone, and recent US data has disappointed. Perhaps fortunes are turning.
Equities remain our preferred asset class given the continuing economic recovery although we need to see further earnings growth to justify valuations, particularly in the US. European equities are cheaper despite the recovery and growth prospects have the potential to surprise on the upside, but low inflation points to a lack of economic momentum. Emerging markets may provide us with some tactical opportunities to invest, despite the more challenging economic backdrop. Expectations of rate rises on the horizon underline our negative stance on bonds, with a particular dislike for government bonds. Where we have bond exposure, we still prefer corporate issuers. We continue to use absolute return exposure to hedge against equity market volatility, which we expect to pick up over coming months. UK commercial property is benefiting from strong investor appetite and positive cash flows into the asset class. Although rental growth is unlikely to be spectacular we like the attractive income characteristics of property which will continue to support valuations in the current low yield environment.
The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital Management does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital Management has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital Management is a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored.