Market update – June 2018


Mediterranean political upheaval

A vote of no confidence in Spain has resulted in the dismissal of Prime Minister Mariano Rajoy who has been in power since 2011 and is credited with steering Spain through the European Sovereign Debt Crisis. Pedro Sánchez, leader of the Spanish Socialist Workers’ Party (PSOE) takes over with the backing of the hard-left alliance and anti-establishment Unidos-Podemos. Previous worries that a leftist coalition could unravel many of the important reforms undertaken are less of a concern now as Spain has enjoyed a rebound in growth, a significant improvement in its annual deficit and its debt sustainability is not in question.

Italy on the other hand is not only in a perilous situation with regards to its public finances, but its sheer size means it is simply too big to bail out.  The coalition of anti-establishment parties enter government with a fragile mandate to implement an economic programme that is likely to see Italy’s public deficit increase. This is the most significant risk in our view, as the economic programme is likely to put Italy’s public finances on an unsustainable path.  We don’t think that the new Italian government poses a significant risk to Italy’s membership of the euro through an organised exit. Although both parties harbour significant anti-euro sentiment, both have an official policy of remaining in the single currency - aligning themselves with public opinion. Italy’s constitution does not allow for changes to international treaties - this includes even holding a referendum on euro or EU membership.

Growth peaking, inflation rising

Global growth remains robust, but we have slightly revised down our forecast for 2018 to 3.4% from 3.5%. This largely reflects a soft start to the year in many economies, higher oil prices,  increased concerns over trade relations between the US and China and European politics. The world economy is still in the expansion mode, but the forecast indicates that a more stagflationary period may lie ahead.

Market implications

We continue to invest in equities as earnings remain supportive, although we are looking for opportunities to reduce risk at the margin where appropriate.  Earnings growth in the US is boosted by tax cuts and buy backs.  Prices are also supported by the return of M&A (mergers and acquisitions) activity, often a feature of late cycle markets. The recent sell-off in bond markets leaves yields looking attractive relative to recent history, but we think prices have further to fall so remain underweight. Instead, we prefer to diversify into alternative asset classes such as property where the yield remains attractive, absolute return to offer downside protection and infrastructure to get exposure to inflation linked cash flows.


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. 

Contact Cazenove Charities

Achieving your charity's investment objectives takes time and thought. To find out how we can help you please contact:

James Brennan

James Brennan

Portfolio Director