Market Update - June
Muted global economic growth
After a series of downgrades, global GDP growth in 2016 is expected to be around 2.5%. Weakening forecasts for the US and Japan, have been offset by better expectations for China and the Eurozone. German, Spanish and French growth has surprised on the upside, whereas the UK economy has seen a sudden slowdown in activity ahead of the EU referendum. Global activity levels remain muted. Rising oil prices have pushed up market inflation expectations, but the overall inflation picture is more subdued. Wage inflation is yet to show a significant pick up despite low levels of unemployment, which is positive for profit margins.
The combination of lower growth and a lack of inflationary pressure has led to a delay in predicted increases in US interest rates this year. Europe and Japan are still focused on monetary easing, using increasingly unconventional approaches in an effort to stimulate growth. The direction of UK rates is dependent on the outcome of this week’s vote. A vote to remain would be viewed as positive for UK economic growth in the short term, and increases the likelihood of an interest rate rise in the coming year.
This week we vote on whether to remain within the European Union. Although polls indicate that the result is finely balanced, the betting markets are pricing just a 30% chance of a ‘leave’ vote. It is difficult to substantiate any of the broader long term economic claims made by either side of the referendum debate. A vote to leave on Thursday would undoubtedly result in an increase in uncertainty, and is also likely to hit business and consumer confidence, causing a slowdown in growth (estimated at around 1% of UK GDP by the end of 2017). Whatever your view on the long term implications, an ‘out’ vote would be likely to have a negative impact on currency and asset prices in the short term, with mid and small cap more affected (less overseas earnings) than the larger companies, and property and financial sectors most exposed. A vote to remain would likely see a positive relief rally in markets in the short term.
Uncertainty adds volatility to investment markets, with asset prices and currencies oscillating according to sentiment. For long term charity investors we focus on fundamental value and over the last year have been increasing the level of diversification within portfolios. We continue to see a lack of value in bonds and prefer to diversify into alternative assets such as absolute return, property and infrastructure. Equity markets offer reasonable value, as long as expectations remain grounded by relatively modest growth prospects. At the same time, given the possibility of greater volatility, we are holding an allocation to cash and absolute return approaches, and will seek to take advantage of any unwarranted weakness.
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