Market Commentary from the MMM Investment Committee
It is now some months since the European Union Referendum and Donald Trump’s election victory. During this period, and despite previous ominous predictions, world investment markets andeconomies have remained relatively resilient. Significant investment gains have been made in many developed and emerging equity markets as corporate earnings start to show signs of improvement In the 8 months since the Referendum, the FTSE 100 index in the UK has risen by around 21% whilst since 08 November 2016 the S&P 500 index in the US has risen by over 10%. It is important, however, to remember that the UK has yet to leave the EU and that there are a number of elections due in Europe this year which could lead to continued political uncertainty.
In the UK, the Bank of England expects the economy to grow by 2% this year, up from a forecast of 1.4% in November and just 0.8% last August. The Bank’s inflation forecasts continue to show price growth remaining above its 2% target for the next three years, peaking at 2.8% in the first half of next year. This means that, although increased inflation can be expected, interest rate increases are unlikely before 2019, and therefore savers with large cash holdings are unlikely to see real growth in the near future. In the meantime, the performance of many multinational companies is supported by falls in the value of sterling whilst those businesses that are more inwardly focussed, and rely on imported materials, are facing increased costs.
Within the EU we expect growth to continue, however, there are a number of risks including the previously mentioned elections and the danger of contagion stemming from the UK’s Referendum.
In the US, a quarter point interest rate increase took place in December with additional rises expected throughout 2017. This, combined with the prospect of massively increased infrastructure spending and a likely tax cut for the American middle classes, has meant that sentiment has been positive. We believe, however, that markets are likely to be volatile due to the risk that the Trump administration’s protectionist policies could inhibit global trade.
In global terms we expect the world’s economies to continue to expand, however, we have concerns about China where debt levels have risen rapidly in a relatively short period of time and more widely in Asia and the emerging markets where we are also apprehensive about debt levels as well as increasing political and social risk.
In summary therefore we continue to be relatively cautious in our outlook, believing that our long term strategy of maintaining significant diversification with an active management approach means our portfolios remain well positioned.