World economy shrugs off uncertainty…for now

Despite the increase in economic uncertainty, the world economy is strengthening with business surveys signalling an acceleration in growth. Concerns about Brexit and President Trump’s populist policies have been swept aside, prompting talk of a crisis in economic forecasting. Growth forecasts are likely to be upgraded, but we still have doubts about the medium term sustainability of the upswing now that oil prices and inflation are rising again.

Europe: improving momentum and fundamentals

Europe faces significant headwinds in 2017. Inflation is set to rise which will reduce the purchasing power of households, while political uncertainty, both at home and abroad, could weigh on confidence. Fortunately, cyclical indicators suggest growth was stronger than expected at the end of 2016, with the momentum continuing into January. Moreover, the economy’s fundamentals are improving, with employment growth rising and wages starting to recover.

Portfolio implications

As economic fundamentals have been improving, so too have earnings. Consensus earnings expectations have not been subject to the usual beginning of the year downgrade cycle. This has supported equity markets, along with positive fund flows with investors moving away from bonds as yields increase and prices come under pressure. Sentiment is also supportive for equity markets, although we are conscious that valuations are not cheap. Nevertheless we are maintaining our equity positions, embracing active management, diversification and nimble asset allocation to help steer portfolios through any volatility.

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