Co-head of Charities
Encouraging global growth and rising inflation
Our predictions for 2017 had three key features, slightly faster growth in the world economy, rising inflationary pressure and increasing interest rates in the US. Data in the first quarter has generally supported this view. Growth numbers look encouraging and signs that world trade is picking up is potentially positive for emerging markets in particular. On the other hand, there is concern that inflationary forces are strengthening. As a result the US Federal Reserve has increased interest rates for the third time. In the UK the Bank of England is adopting a ‘wait and see’ attitude as Brexit negotiations begin, with the Governor, Mark Carney, making it clear he is not in favour of a policy response to rising inflation – for which he sees the fall in sterling as solely responsible.
Equities supported but increasing volatility
As more evidence emerges of broader synchronised global growth rather than a dependency on the US, confidence in the durability of this upswing should increase. This is likely to support risk assets but prove challenging for bond markets facing the prospect of less accommodative monetary policy and rising inflation. It may seem ironic that better economic conditions may lead to increased volatility in markets, but as liquidity is tightened we are likely to experience more oscillations in markets – amplified by ongoing political uncertainty. This may provide an opportunity for long-term investors and active managers.
Recent elections have shown that ‘anything can happen’ at the ballot box. Market and media analysts were wrong-footed by the Brexit vote in 2016 and by the unexpected success enjoyed by anti-establishment candidates and parties around the world. Nonetheless, it is fair to assume that the announcement of a UK general election to be held on 8th June will lead to some increased uncertainty for the UK economy as consumers and corporates try to identify the implications of the visions articulated by the competing parties. This uncertainty will be compounded by the fact that Mrs May is explicitly seeking a mandate to push Brexit through parliament. Throughout the campaign, we will therefore be carefully watching surveys of corporate investment intentions and consumer confidence to measure any economic effects and their bearing on the performance of UK equities. Whatever the outcome, uncertainty will continue after the votes are counted.
For charity portfolios we are retaining our exposure to equities, staying with momentum as markets grind higher. Positive earnings are supportive, as is improving economic growth, but we are tilting towards areas where valuations are less stretched. Bond markets remain unattractive in our view, and we maintain our underweight position. Diversification into property, infrastructure and absolute return is favoured where appropriate, to offer some ballast to portfolios should volatility return.
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 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 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 is part of the Schroder Group and 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.
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