Co-head of Charities
Positive economic momentum
The world economy has started 2017 with strong momentum and business surveys continue to signal robust growth. Economists have upgraded forecasts and we are now focusing on whether the current economic strength can be sustained. As activity has picked up, so too has inflation – although much of the move so far has been from oil price increases. Rising inflation provides a direct threat to conventional bonds and to consumer spending and we are cognisant of the impact this could have on earnings and equity markets.
Political uncertainty continues
The Dutch election result prevented the anti-immigration Freedom Party gaining power and provided reassurance to investors concerned about the rise of more populist anti-EU governments. The future of the EU and the stability of the euro are perceived to be potentially at stake from upcoming elections in France and Germany this year. Although we see the probability of an extreme outcome as low, uncertainty is likely to persist until the election outcomes are known later this year. Investors will now turn their attention to the French presidential election over the next few months which could have significant consequences for the EU should Marine Le Pen’s Front National win, a possible outcome though not our central scenario. We will also see the UK triggering Article 50 this month, starting the proceedings to leave the European Union in around two years’ time. We do not expect a market reaction given that it has been widely flagged for some time.
The strengthening economic backdrop is positive for corporate earnings, and the prospect of expanding fiscal policies supports equities. We retain our position in equities to benefit from earnings strength and positive sentiment, although are conscious of valuations and are biased towards active managers following a ‘value’ approach to investment. Inflation and political risk in Europe are headwinds for conventional bond markets, and we continue to advocate an underweight position. UK commercial property capital values have been supported by overseas investment, as sterling weakness has discounted UK property assets. We remain well disposed to property as the income characteristics are attractive. Our charity portfolios remain diversified, with allocations to alternative investments and absolute return approaches to dampen overall volatility in uncertain times.
Co-head of Charities
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