March and Q1 asset class returns

With markets in calmer waters, a number of previous concerns receding and the global economy still making steady progress, it is possible that some of the potential market volatility that we foresaw will not come to the fore. However, there are undeniably also still obstacles and threats that have not been removed, like the slowing of growth rates in China and the US or political instability in South Africa and the threat of Turkey formally turning into an autocracy. The poor US employment numbers for March may have been caused by temporary effects like the snow storms in the East, but they serve as a reminder that markets are right to pause in their further upward movement until more evidence emerges about the true state of the economy.

US – China summit amid hawkish signals from the Fed

So, despite the moans of foul play from the President’s camp, we don’t expect US-China relations to turn sour enough to materially damage either country’s economy, especially with the North Korean crisis requiring cooperation on both sides. Given the threat posed to market sentiment from this summit, and with Trump’s hands currently tied on many of his other economic policies he promised on the campaign trail, we expect a further fizzling out of the so-called ‘Trump Trade’. Instead, US investors will largely be driven by both the signs coming out of the US central bank (Fed) and the underlying economic momentum.

It seems to be becoming consensus opinion that, despite all the pomp over the ‘reflation trade’ of the past few months, the upward momentum of the US economy perhaps isn’t as strong as was thought at the beginning of the year. As we noted in these pages some weeks ago, this view is reinforced by a growing discrepancy between ‘soft data’ (sentiment surveys) and ‘hard data’ (actual performance). While hard economic data has been improving, it hasn’t kept pace with the strength of business and consumer sentiment surveys, the two painting different pictures of the economy and making investors wonder which is correct.

Slowing UK house price growth

We anticipate that house price growth will likely continue to moderate over the course of 2017, as the pressure on household incomes builds – itself a result of higher inflation (mostly from a weaker Pound), subdued wage and employment growth.

Over the past four years, the housing sector has been a strong growth engine, but evidence is mounting that this is now faltering, amid rising uncertainties related to the Brexit negotiations and where the UK economy might stand at the end of this process.

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