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. 

European referendum

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. 

Portfolio implications

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.

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. 

Contact Cazenove Charities

Achieving your charity's investment objectives takes time and thought. To find out how we can help you please contact:

James Brennan

James Brennan

Portfolio Director