We have been broadly optimistic over the outlook for equity markets this year, and have seen them move higher across the board – in some cases very strongly. At the same time, we have been emphasizing the need to understand that there are risks and that there may well be periods of uncertainty or worse. Some of the triggers for nervousness are now approaching – the next rise in US interest rates, elections in Europe and, of course, the UK starting the process of leaving Europe.
On the up
There seems to be a clear consensus that US interest rates will go up this month. It is not exactly a shock to us and has been widely discussed for a long time. The likelihood of a tantrum, or even a hissy fit, in markets seems pretty unlikely. We still feel that the rise reflects confidence in the US economy and that it should, therefore, be seen as a good thing. The real key, of course, lies in the rate at which subsequent moves are made. Too far and too fast would be a very real threat and something investors should rightly be nervous of. However, we expect things to be handled much more prudently and remain optimistic.
What do you do about Europe?
On the one hand, Europe looks like a political basket case. On the other, there seems to be some real traction in terms of economic recovery as deflation retreats and sentiment picks up. Which will be the winner in this conundrum? Given some of the recent strength in equity markets, the short term looks as if the winner will be the worries over the politics. Whether it is Dutch or French elections, Turkish threats or debt worries, there seems to be a taxi rank of anxious moments forming. However, if the underlying economic picture continues to improve, then the medium term outlook could be much brighter. It may not be time to jump in yet, but we will be watching developments closely.
Pulling the trigger
The political wrangling and accompanying media speculation about the UK leaving the European Union seems to go on and on. Sadly, it is not going to stop any time soon either. However, we do seem to be approaching the end of the beginning which will be marked by the triggering of Article 50. Of course that simply marks what may well be years of more posturing and squabbling. Such European negotiations have something of a game of Mornington Crescent about them – they appear improvised, incomprehensible and lacking rules. The big difference is, of course, that, they are not funny. Well, not often anyway.
As investors, we need to look through this noise and assess what will be the likely impact on UK assets. At this stage, we see most of the ‘action’ being likely to be seen in the currency in the short term. The pound has already fallen considerably. Inevitably, depending on the political viewpoint, this has been seen as either a calamity for the economy or the best thing for UK exporters in years. Some of these arguments feel rather speculative to us. Looking towards the medium term we feel the pound may well be over sold – and this is why we have recently ‘repatriated’ some of our US dollar linked positions. We still like UK equities – despite our recent profit taking – and, as in Europe, continue to view any forthcoming weakness as more of an opportunity than a threat.
Yet again, we find short term worries looming large over a generally sound economic backdrop. We have been more defensively positioned in expectation of these concerns, but have also made sure that we participated in the upward moves too. The coming weeks may well be challenging. They will certainly be tedious in terms of more noise.
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