Market Update - July
Events on the horizon moving closer…
Investors have been discussing the issues in the Eurozone and anticipating interest rate rises in the US and UK for a number of years. However, these events are now in greater focus. The Greek debt crisis continues with a provisional bail out agreement providing some short term relief. We also expect an interest rate rise in the US this year, with the UK following suit in early 2016.
A road map to a long term bail out deal for Greece has been agreed, but not without Greece making major concessions previously rejected both by the Prime Minister and the nation in the recent referendum. This agreement reduces the probability of Greece exiting the Eurozone but there are still considerable hurdles to overcome, with the need for Greek parliamentary approval and additional ratification in Eurozone member state parliaments, including Germany. While uncertainty caused by the Greece situation has dented confidence in financial markets, we do not believe that a Greek exit from the Euro would cause lasting economic damage to the Eurozone. The Eurozone economy is still expected to expand appreciably faster during 2015 than was widely predicted at the start of the year, showing better growth than in 2014. In this context, it should be noted that Greece accounts for just 1.8% of Eurozone GDP (2014), with a relatively small share of trade flows, and makes up less than 0.5% of broad European equity indices.
Inflation and interest rates on the up?...
Economic growth in the US has recovered after a weaker than expected start to the year. There is now growing evidence of rising wage pressure and we expect inflation to reflect this. The Fed is likely to respond with an initial increase in interest rates later this year. The UK economy is also expanding although the rate of growth may slow. There is also evidence of UK wage growth and an increase in consumer credit which, combined with a steady increase in the oil price, is likely to result in a pick up in UK inflation. We expect the Bank of England to raise interest rates in early 2016.
We expect to see continued market volatility. Equity markets have already fallen in response to uncertainty around the ‘Grexit’, and we have seen an increase in bond yields to reflect the expectation of interest rate rises. Equity market valuations remain reasonable and we continue to be attracted to the prospect for corporate earnings growth in certain developed markets (although growth has slowed in the US) and may look to take advantage of any opportunities that market volatility presents to add to equity positions. We remain pessimistic on the prospects for government bonds, and prefer to hold absolute return approaches as defensive assets within portfolios where appropriate. Property should be supported by rental yields although capital growth is likely to slow. In this environment we believe in the benefits of a diversified approach and continue to expect our multi-asset portfolios to be insulated against the worst of any equity market volatility.
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