Market update - June

08/06/2017
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Authors

Kate Rogers
Head of Sustainability, Wealth

UK political uncertainty creates sterling weakness

The loss of a Conservative majority leaves the UK with greater political uncertainty and a more challenging background to Brexit negotiations, which are due to start on the 19th June. While some will argue a coalition government may lead to a 'softer' Brexit, the weakened negotiation stance and time pressure could potentially cause a 'harder' Brexit or no deal. This uncertainty poses downside risks to sterling and to UK growth. Given the Conservative losses, we think policy might move to be more populist and pro-growth which, along with sterling weakness, could increase inflationary pressures.

Domestic assets face challenging outlook

Large cap UK equities are net beneficiaries of a weaker sterling as most of their earnings come from overseas. Domestically biased smaller and mid-sized companies are likely to suffer from the more challenging UK environment. UK government bonds are negatively impacted by rising inflation expectations and we are unenthusiastic about their prospects.

Portfolio implications 

Despite the worsening outlook for the UK, the global recovery in activity remains intact and upgrades to European growth are offsetting the slightly weakening outlook for US and Emerging Markets. We are retaining our exposure to equities to benefit from the global growth environment, which should translate into corporate earnings. We still favour exposure to overseas equities given the uncertainty surrounding the UK; by investing in unhedged overseas equities directly and through tilting towards large cap equities in our domestic portfolios. The election result overnight underlines this view. Bonds remain unattractive and we value diversification into alternative assets such as infrastructure or absolute return funds where appropriate. 

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This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

Authors

Kate Rogers
Head of Sustainability, Wealth

Topics

Kate Rogers
Charities
Brexit
Market views
UK
Politics

The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.