Market update - July


Global growth on track but macroeconomic concerns return
Despite weakening growth in the UK we maintain our 2017 global growth forecast at 2.9%, supported by strong growth in the eurozone and steady growth in the US, Japan and China. Inflation has risen, but appears to have peaked in most major economies following the stabilisation of energy costs. Concerns over rising protectionism are fading as President Trump has yet to translate rhetoric into policy. However, traditional macroeconomic risks are making a comeback with investors worrying about increasing interest rates in the US, persistently low economic growth and even a Chinese hard landing. 

Europe strengthens whilst the UK runs out of steam
Despite this uncertainty, the eurozone appears to be going from strength-to-strength with broad improvements in growth and a reduction in political risk on the back of Macron’s victory in France. In contrast, the UK economy seems to be running out of steam. Growth has been hindered by the weakness in the pound and the resulting pick up in inflation, combined with the post referendum slow down in business investment. As cost of goods increase faster than wages, consumer spending is likely to continue to weaken. The Bank of England is under pressure to increase interest rates in response to rising inflationary pressure although there is concern that this would further stifle growth. We are not forecasting a rate rise in the UK this year.

Portfolio implications
While we expect economic growth to remain supportive, we note the recent weakness in some leading economic indicators which may cause the equity rally to pause for breath. In the UK, deteriorating earnings momentum, weaker economic growth and the overhang from concerns around the Brexit negotiation process continue to weigh on sentiment. However, it is worth remembering that the UK equity market with over 70% of its earnings generated overseas is not representative of the UK economy. Further afield, we view the US as more defensive equity exposure albeit at more expensive valuations. We prefer European equities where earnings have improved markedly in spite of a strengthening euro, while monetary policy remains accommodative and valuations continue to look attractive. Emerging markets equities are set to benefit from the long-term pro-cyclical recovery and are currently enjoying the tailwinds of a weaker US dollar and favourable valuations. We remain underweight bonds and prefer to diversify into alternative assets such as absolute return and infrastructure where appropriate. Property offers an attractive income return although capital returns are likely to be underwhelming in the near term. We expect to see a pick up in volatility which should provide opportunities for long term investors.


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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James Brennan

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