Market update – November 2017
Global economy, firing on all cylinders
Last month the improvement in the world economy was given the official seal of approval by the International Monetary Fund which revised up its projections for global growth. Although the outlook for both the US and UK was downgraded, this was more than offset by upgrades in the eurozone, Japan and Emerging Markets. Whilst such forecasts can be seen as lagging indicators, there are signs that this positive momentum in global growth could be sustained with leading indicators pointing to synchronised strength. However, despite the strengthening of activity, inflation remains relatively subdued in most economies creating consternation amongst policymakers whose models would have predicted a pick-up in wages and prices. The outlier has been the UK economy, where inflation has reached five year highs and the Bank of England has responded with an increase in interest rates.
Eurozone political risk still simmering
Though many of the major political obstacles have now been overcome, events in Spain highlight that political risk continues to simmer under the surface. Elections in Austria, the Catalan situation and recent referendums in Italy all highlight a trend towards populist, nationalist and now regionalist tendencies. The investment impact of these political risks is cushioned by quantitative easing (QE), and the boost that this brings for the economy and financial markets. The European Central Bank is set to keep QE going into 2018, but will eventually phase out the policy over next year.
Implications for portfolios
Our charity investment portfolios have benefited from the growth in economic activity, earnings and consequently share prices. We retain our holdings in equity markets, as global economic growth remains supportive and earnings forecasts are positive. Equity valuations are no longer cheap, although there are opportunities and our portfolios are tilted towards those companies, funds and regions that offer best value. The slight change in tone from many central banks means that we are likely to see a gradual reduction in monetary stimulus over the coming years. At some stage we expect this to translate into increased bond yields and remain cautious on the prospects for bond markets, particularly if inflationary pressure builds as a result of stronger global activity. Alternative assets are valuable diversifiers in portfolios and we include absolute return funds to provide a ballast where appropriate and property for attractive income characteristics.
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