February 2017 asset class returns; Sentiment shift or still ‘Trump rally’?; Europe: Welcome return to broad based growth; UK economy: too reliant on the consumer?
February 2017 asset class returns
For the moment the jury is out, whether the economic momentum that has built up since April/May last year will overcome political headwinds as it did in 2016, or whether we will witness a major paradigm shift against trade and globalisation.
At Tatton, we see the odds as fairly balanced which leads us to maintain our neutral asset allocation positioning between riskier growth assets and lower risk fixed interest bond assets. However, at the regional and currency level we see significant differences in relative valuations, with considerable catch-up potential in some areas.
In past years that displayed similarities in setting with 2017, stock markets have sometimes suffered sudden and painful corrections. A policy error or failure of judgment on the political side could well interrupt the current strong market dynamics. For this reason and mainly this reason, we are hanging on to long duration bond positions which we do not expect to provide much upside over the medium term, but could once again prove to be very useful counterbalancing other portfolio areas, when growth assets hit a stretch of unpleasant bumps.
Sentiment shift or still ‘Trump rally’?
The US (and global, for that matter) economy now largely has enough of its own momentum and has become more sanguine about the political situation. Against this momentum is Trump and the detrimental potential effects of some of his more outlandish policies. But, should the checks and balances of the US political system continue to frustrate his agenda enough so that it doesn’t become a problem for businesses – we expect that the economy will keep going along as it has.
Of course, however, if Trump has taught us anything so far it’s that his potential to rock the boat shouldn’t be underestimated. So, for now then, perhaps a bit of cautious optimism is appropriate. Whatever the case, the ‘Trump rally’ is a misnomer – the rally has its own fuel and Trump is currently still more along for the ride.
Europe: Welcome return to broad based growth
There is general consensus on the reasons for the renewed performance of the EZ, not least, it is starting from a relatively low point (as did the US and other nations post – Global Financial Crisis), with some countries still undergoing reform and re-balancing. Also, the UK’s vote to exit the EU has not had the negative material impact some were expecting and, noting arguments to the contrary, all countries in the EU appear to have benefitted from the accommodative monetary policies of the ECB.
As ever, there may be a fly in the ointment. EZ growth could be hindered by sluggish structural reform and remaining balance sheet adjustments in a number of countries and sectors. Also, inflation and financing costs are low and unemployment is declining, which is driving consumer spending, but this could change in the face of returning inflation and other risks. The main other risks facing the EZ are the same as those in many regions around the World, protectionist policies and/or monetary tightening in the US, and the ongoing political cycles and risks.
UK economy: too reliant on the consumer?
We expect the trend for household spending is likely to point downwards, given softer retail sales data in January, following the last likely post-Brexit high point. Higher prices for everyday items like food should apply downward pressure on day-to-day spending. Retail analysts suggest that trading in 2017 has had a “tough start”, especially for items like clothing, and this trend is even beginning to appear in essential items.
The precarious and possibly unbalanced nature of future economic growth in the UK is highlighted by data from the ONS. The ONS state that sectors that are leveraged to consumer spending have accounted for 25% of growth since the referendum, more than double its normal importance. We believe this indicates the economic vulnerability to any slowdown in consumer spending.
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