Market Update - July

Downgrades to UK growth post referendum

The vote to leave the European Union has led to a downgrading of near term UK growth expectations.   We expect a  slowdown, although a recession should be narrowly avoided.  Stagflation looms as the inflationary impact of a weak sterling comes through.   However, at just over 4% of global GDP, the UK is not significant enough to derail the world economy.  Easier monetary policy will also help soften the blow and global growth is expected to be only slightly lower than that anticipated before the referendum result.   Despite this, we recognise the increasing tail risks following the UK’s decision.  Political risk has clearly risen within Europe as the UK experience could be repeated elsewhere.

Certain uncertainty

As the markets continue to process the outcome of the referendum, it is clear that the implications are complex and long lasting.  The wide range of 2017 UK GDP forecasts highlights the high degree of uncertainty.  The medium term global economic and policy outlook remains unclear, and political risk adds an additional ambiguity.  The UK market has punished domestic earners, with the larger more international companies significantly outperforming since the vote.  Sector dispersion has been considerable, and volatility has remained elevated.  Corporate earnings are in focus, with currency volatility a significant factor for international earners; fears that reducing corporate and consumer confidence add to the potential for disappointments.

Portfolio implications

We continue to see a lack of value in bonds, particularly with the anticipated pick up in inflation and prefer to diversify into alternative assets such as absolute return.  Where we hold cash, we view it as a defensive asset, to provide us with liquidity to take advantage of any unwarranted weakness.  Equity markets are likely to remain volatile, but should be supported by monetary policy.  The outlook for UK commercial property has not been helped by the vote, but we believe that the attractive income flow should underpin values. We maintain that diversification will be crucial in navigating markets over the next few months as our interpretation of the political and economic landscape evolves. 

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

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