Market update - August 2018
The charities team shares our current views on the markets.
Near-term activity indicators – such as purchasing managers’ indices and various national surveys – are holding up in both developed and emerging markets; but wider concerns around slowing Chinese GDP growth, weaker commodity prices and a stronger US dollar suggest that we may be entering a summer lull. After the sharp recovery in activity in 2017 when the world economy was firing on all cylinders, growth has been slightly less synchronised in 2018 and these three factors may bring about a period of slower growth for the world economy. The US is the largest economy in the world and has held up well thus far, but activity in Asia and Europe has lost momentum. Unless business confidence and investment are undermined by ongoing trade wars, which may just be getting started, the world economy should recover.
UK: Brexit consequences brought into focus
After more than two years since the referendum to leave the European Union, the UK government has finally laid out its plans for its future relationship with the EU. Neither Brexit supporters nor Europhiles are happy with the compromise, but time is running out and the risk of leaving without a deal at all is escalating. The current proposal appears most beneficial for manufacturers as it pushes for a free trade deal and frictionless borders – a plan which ties in to the EU being the UK's largest trading partner. However, it looks increasingly likely that the services sector will face a somewhat ‘harder’ Brexit, with the potential for no trade deal an option. Within this group sits financial services, a sector which is estimated to have contributed £72.1 billion in tax in 2017, or 11% of government receipts. Damaging financial services will not only lead to the loss of high value-added jobs, but also hurt public finances and public spending; measured reasoning and a common resolve from both sets of negotiators is key for an optimal outcome. Despite potential headwinds for various businesses, for us as investors, any sense of certainty is always welcomed.
Implications for portfolios
Upon review of economic, political and market data we are happy to maintain our strategic position to equities to benefit from earnings growth, while preferring broad global exposure. Conventional government bonds remain unattractive in an environment of rising inflation and we remain wary of investing given the potential for capital loss if Central Banks start to raise rates. Where appropriate, we look to diversify into alternative assets, such as absolute return, infrastructure and property to reduce our reliance on equity markets as the main source of returns. We have seen greater volatility in markets year-to-date and expect this to continue, whether provoked by politics, trade wars, sentiment or economic shocks. After a significant period of growth in asset prices, now is the time to be managing risk actively in portfolios and we remain alert to changing circumstances.
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.