Market Update - December

Fiscal stimulus lifts growth expectations

Concerns over the efficacy of monetary policy and apparent quantitative easing fatigue means that a new orthodoxy is emerging focused on fiscal policy which could revive hopes of stronger growth. We have increased our 2017 global GDP forecast to 2.8% on expectations of stimulus from the Trump administration and China, alongside slightly better performance from countries such as the UK. Global inflation is likely to rise to 2.5%, possibly even 3%, as year-on-year energy price inflation rebounds from the lows.

Political risks ahead

In the US, Trump's protectionist stance casts a shadow over global trade and the outlook for the emerging markets. Certainly he is likely to emphasise "fair trade" over "free trade" but whether that will take the form of tariffs remains to be seen. European politics could also provide a source of volatility in 2017. With a number of significant elections, a clear anti-establishment mood and a dormant sovereign debt problem, we remain conscious of our exposure in this region.

Portfolio implications

Rising inflation expectations support our underweight, low duration position in government bonds. After several years in which bond markets have delivered strong performance, they are increasingly vulnerable to higher interest rate volatility. Also exposed are the 'quality' areas of equity markets where the low growth, low interest rate environment has resulted in extended valuations. Over the course of 2016 we have become more attracted to 'value' areas that had been out of favour. As central bank influence on global markets diminishes, increasing investor focus on stock fundamentals could help to unlock the value of these under-owned stocks, boosting their prices.

We enter 2017 looking to build on and protect the strong returns of 2016. Our charity portfolios remain diversified by asset mix and approach, and we continue to be vigilant and ready to tackle the challenges and opportunities that the next year may present.

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. Registered Office at 1 London Wall Place, London EC2Y 5AU. 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

James Brennan

Portfolio Director