Market Update - October
Economic outlook remains uncertain
Global growth continues to be downgraded as the sluggish economic environment persists. In the UK, retail sales figures indicate that consumer spending has yet to be negatively affected by the referendum result. However, we continue to monitor the down turn in business confidence and expect a slowing in domestic business investment as a result of the upcoming negotiations with Europe. The wide range of UK growth and inflation forecasts for 2017 demonstrate the uncertain outlook. We anticipate a slowing in growth and increasing inflationary pressures, driven by a weak sterling and stabilising commodity prices. We expect monetary policy to remain accommodative and are seeing increasing use of fiscal policy measures to support demand globally. The UK chancellor has signalled a scaling back of austerity, and both US presidential candidates have discussed planned infrastructure programmes.
Political risk is elevated
The divorce settlement between the EU and Britain is just one of a number of political risks facing markets over the coming months. Theresa May’s talk of a ‘hard Brexit’ has had a clear detrimental effect on sterling. Relative to history the pound now looks oversold, but it is difficult to see a catalyst for any significant rerating in the short term. The upcoming US presidential election could be a source of volatility, with fiscal expansion and trade protection on the agenda, and there are a string of elections across Europe that could destabilise markets.
Given this uncertain economic and political backdrop we continue to favour diversification in portfolio construction, including assets such as property,
infrastructure and absolute return alongside core equity positions. Equity valuations are generally looking fair when compared to bonds, but we recognise that this is being artificially supported by the low interest rate environment. Bonds are unattractive at current yields, particularly as we expect UK inflation to pick up. Where held, cash will be used as a tactical asset, to take advantage of any volatility in markets over the coming months.
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. Limited 12 Moorgate, London, EC2R 6DA. 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.