Economic outlook: Politics dominates the headlines

01 Jun 2017 In-depth

Prime Minister Theresa May

Prime Minister Theresa May’s surprise announcement that there will be an election on 8 June has been welcomed by markets, pushing sterling higher against the US dollar. Analysts expect May to gain a larger majority and consequently more power to ignore those calling for a “harder” Brexit.

In Europe, meanwhile, the victory of Emmanuel Macron in the French presidential election provided welcome relief to markets concerned about the populist movement and the stability of the eurozone.

In the US, President Trump’s erratic leadership style continues to create much policy uncertainty and political risk. But overall, strength in earnings is supporting equity markets in the UK, the US and Europe.

UK consumers feel the pinch

As anticipated, inflation has continued to rise and economic data reveals that consumers are feeling squeezed. The savings rate has hit a record low and retail sales have fallen sharply, increasing the likelihood that the economy will slow and making the election more urgent for the government. As long as real wage growth fails to materialise, we expect the Bank of England to refrain from increasing interest rates.

On the other hand, with growth strengthening and core inflation rising, US interest rates are expected to continue to increase. Eurozone growth is encouraging, although political uncertainty may hamper business investment.

Emerging economies are likely to benefit from the growth in the developed economies, but US interest rate rises may weigh on activity. We also expect concerns over China’s growth to persist, which can in part explain the recent volatility in commodity prices.

Equity market volatility

Given these political and economic shifts, it is perhaps surprising that the equity markets are showing such low volatility. We expect volatility to increase at some stage and are favouring diversification in our charity portfolios to protect against the worst of any market falls.

Rising inflation is not good news for cash and bonds and we prefer absolute return funds to provide the ballast to portfolios.

Emily Petersen is a portfolio director at Cazenove Charities


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