Our outlook remains much the same as in March. We have seen nothing to suggest that the global economy is likely to stop growing.
Evidence coming through from the US suggests we may have underestimated the positive impact that the fiscal stimulus has contributed to an already vibrant economy. Whilst the current rhetoric on trade wars and sanctions is causing some anxiety, we would remind investors that in the summer of 2017, the noises coming from the US at that time were starting to get people worried about a full blown nuclear conflict in the Korean Peninsula, and yet today we seem to be closer than we have ever been to a peaceful resolution. Now we can’t always guarantee that the bluff and bluster will change into a mutually beneficial outcome, but is important to remember that President Donald Trump’s negotiation stance is more like haggling in a market than it is diplomacy. Start out with a ludicrous price suggestion, then threaten to walk away – it might not make for a stress-free shopping trip, but it doesn’t mean you won’t be eating.
In Europe, we believe the economic data is likely to pick up. More than that though, we believe that most of the wider world has overreacted to some of the recent data in Europe – categorising it as downright negative. This misses the point that the European growth situation is stronger than it has been since the Financial Crisis. We are now in a far more ‘normal’ position, where there will be occasional slow quarters, as there will be occasionally outstanding quarters. None of these should be troubling.
What does this mean for growth assets such as equities? We believe that the pattern already established this year is likely to repeat. Sharp market moves upwards and downwards are very likely – but overall the direction should be upwards for most global equity markets in a growing world.
With that in mind, we turn our attention to central banks, and how they deal with a world that is rapidly approaching that ‘normal’ state of affairs (in as much as that can ever be said). Interest rates are going up, that much we know. The US 10-year Treasury Bond creeping over a 3% yield caused a few excitable headlines in April, and we would expect to see a few more of these over the next year or so. Ones to watch for are the UK 10-year heading for 2%, and the German 10-year heading for 1%. In one way, this is all well and good, and indicates that the economy is healthy and can cope with a more conventional rate environment. In another way, however, the journey to higher rates is still our principal concern for cautious investors, along with central banks beginning to sell bonds, rather than buy them.
We still maintain that bonds are important to protect portfolios against economic downturns and shock negative events. However, the cost of holding them is now potentially a lot greater. We continue to try and balance holding some bonds for tail risk protection with decent allocations to alternative investments that can at least deliver inflation beating returns, whilst being more cautious than equity investments.
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