Market Update - January
Upgrades to global growth
Expectations for global growth in 2017 have been upgraded, led by the US, where fiscal loosening is anticipated to provide a boost this year and next and also a more optimistic view on the UK, where the Brexit effect has been smaller than originally expected. Inflationary pressure is rising globally, with the UK particularly exposed to increasing inflation through sterling weakness. Despite this, we expect interest rates to remain on hold in the UK, due to the uncertainty of negotiating an exit from the EU. In contrast, we predict a continued upward trajectory for US interest rates.
Policies and politics
It is a strange environment when a 140 character tweet can determine the short-term direction of equity markets. The decisions and progress of the Trump administration will be critical for markets this year. We are expecting fiscal packages to generate a boost to US GDP, but assume a scaling back of the plans currently articulated by the president elect, as Congress attempts to create deficit neutral tax reform. Politics also continue to loom large in Europe. Notwithstanding the Brexit negotiations, general elections in the Netherlands, France and Germany all feature this year, and we may also see a vote in Italy. Our outlook for the European economy is one of steady growth, but this forecast does not incorporate any major electoral upsets.
We expect the impact of central bank policy to diminish over the coming years, with fiscal stimulus favoured to support growth. The ‘reflation’ trade has taken equity markets higher, and bond markets lower. In this environment we have seen market rotation away from bond-proxies, where valuations of ‘quality’ stocks had become extended. Conversely ‘value’ approaches have benefitted, as investors refocus on fundamentals. Our charity portfolios tend to be biased towards this value style, and we retain our underweight to bond markets. We believe that diversification remains attractive, as political risk and sentiment oscillations are likely to cause volatility and will continue actively managing our client portfolios to benefit from the opportunities that any such market fluctuations may present.
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