Market Update - October
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.
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