Category: Financial Planning, Investment management, Thought pieces

Economic Outlook – March 2018

The Committee discussed the current economic and market environment and the following is a brief summary of the Committees views:

• Global growth continues to look strong led by the USA

• Despite the recent and expected interest rate hikes in the US and the UK, monetary policy remains relatively loose globally

• In the US, the Fed is expected to target financial stability rather than inflation, while in Europe and Japan the QE experiment continues

• Potential geopolitical shocks currently represent the biggest threat to global growth

• A full-scale trade war between the US and China will not be helpful to anyone

• It is possible that China and the US will find an agreement prior to entering a full-scale trade war, with China agreeing to the US’s demands to further open parts of its markets to foreign investors, which is likely to be positive for the future global growth

• Future prospects for European equities continue to be uncertain due to tensions between some countries within the bloc and a wave of populist movements primarily in the Southern and Eastern parts of Europe

• Italy’s banking sector looks fragile with c.17% non-performing loans

• Brexit negotiations will now be extended to 2020

• The performance of the UK economy is likely to be stronger than predictions made by the OBR and BoE

• Despite the UK’s performance being stronger than expected, it is likely to continue to be suboptimal until the Brexit deal has been finalised

• With lower CapEx and declining immigration, the labour market in the UK is likely to remain tight and real wages are expected to grow. Higher wages and tighter monetary conditions are expected to hit businesses operating on low margins, which will struggle and go out of business

• Longer term real wage growth is expected to be the main driver of the UK economy, which is consumption oriented

• Liquidity and credit risks are currently high, as many investors have significant allocations to lower quality assets, which are less liquid and often cannot be accurately priced

• Markets are slowly beginning to normalise and correlations between asset classes are starting to decrease giving an opportunity for active investors to outperform

The potential investment opportunities identified:

• Rising profit margins and expectations of real wage growth make equities look attractive and the recent market falls are likely to provide a buying opportunity

• Asia and Emerging Markets continue to look more appealing for medium and higher risk investors

• Longer duration corporate and sovereign bonds are entering a downwards cycle and short duration bond funds are expected to outperform

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