Co-head of Charities
15 May 2017
Politics dominates headlines
Prime Minister Theresa May’s surprise announcement that there will be an election on 8th June has been welcomed by markets, pushing sterling higher against the US dollar. Analysts expect May to gain a larger majority and consequently more power to ignore those calling for a “harder” Brexit. Meanwhile, the UK consumer is starting to feel the pinch. The savings rate has hit a record low and retail sales have fallen sharply, increasing the likelihood that the economy will slow and making the election more urgent for the government. In Europe, the victory of Emmanuel Macron in the French presidential election proved welcome relief to markets concerned about the populist movement and the stability of the eurozone. Macron still has plenty of work ahead of him. As the founder of a new political movement he faces challenges in forming a government in the upcoming parliamentary elections. In the US, President Trump’s erratic leadership style continues to create much policy uncertainty and political risk, although strength in US earnings is supporting equity markets.
Make hay while the sun shines
Meanwhile global growth is expected to come in at 2.9% in 2017 (after 2.6% in 2016), led by the advanced economies; whilst inflation rises to 2.7% (from 2% in 2016), largely due to higher oil prices. With growth strengthening and core inflation rising, US interest rates are expected to continue to increase. Conversely, despite the sharp rise in UK inflation, we are not anticipating interest rate rises as growth is likely to slow. eurozone growth is more encouraging, although political uncertainty may hamper business investment. The Japanese economy is supported by looser fiscal policy and a weaker yen, but investor sentiment is currently dampened by an escalation in tension around North Korea. Emerging economies are likely to benefit from the growth in the developed economies, but US interest rate rises are likely to weigh on activity. We also expect concerns over China’s growth to persist, which is part of the reason for the recent volatility in commodity prices.
Equity market volatility near 30 year lows
Given these political and economic shifts, it is perhaps surprising that the equity markets are demonstrating such low volatility. Certainly we expect volatility to increase at some stage and are favouring diversification in our charity investment portfolios to protect against the worst of any market falls. Rising inflation is not good news for nominal assets. We remain underweight cash and bonds, preferring absolute return funds to provide the ballast to portfolios. Equity markets, which represent the core of our charity portfolios for long term investors, are benefitting from stronger economic conditions and positive corporate earnings growth. Alternative assets, such as property and infrastructure, provide attractive income and inflation protection over time and are included in portfolios where appropriate. Rising volatility may feel uncomfortable, but allows long-term investors to benefit from opportunities presented by any short term dislocations.
Co-head of Charities