8th August 2017

Investec Wealth: Market Commentary

Every day we seem to wake up to more bad news: the latest upheavals in the White House; crises in the UK's public services; populist outcry in any number of countries; and missile tests in North Korea, to name but a few regular headline-makers. 

Market Commentary provides a general overview of topical market and economic issues.

Overview

And yet the last six months has been another period of prosperity for investors, with equity markets making several new all-time highs and volatility remaining low – a classic case of what is described in financial circles as “climbing a wall of worry”. 

Investors have been worried about a lot of things for a long time. The Financial Crisis and the Eurozone Crisis are firmly imprinted on everyone’s minds, and it is human nature to fear a repeat performance. Political outcomes, not least the UK’s EU referendum result and the election of Donald Trump as President of the United States, reduced much conventional wisdom to rubble. 

The rise of populism in Europe threatened the integrity of the whole European project. But here lay the opportunity. When the worst outcomes fail to materialise, investors heave a sigh of relief and concentrate on the underlying health of economies and companies, and in this respect everything looks much rosier, at least on a global level. 

One key feature of the global economy at the moment is that it is growing almost everywhere. Not at its pre-financial crisis pace, to be sure, but at what appears to be a sustainable level above 3%. Economists, on average, have raised their growth forecasts since the start of the year, with Europe a key component of those upgrades, a welcome development after years of unfulfilled promise. 

China also continues to defy the sceptics, with growth of 6.9% in both the first and second quarters. If there were disappointments, they were in the US, which had its now seemingly regular weak start to the year (which in itself raises questions about the reliability of the data), and the UK, where Brexit uncertainty and an inflationary squeeze on real incomes appear to be having an increasingly depressing effect on investment and consumption.

Politics continues to dominate the headlines. Here in the UK March’s triggering of Article 50, which fired the starting gun on the process of the UK leaving the European Union, was quickly followed by the calling of an entirely unexpected general election. That had an equally unexpected result, not least for Prime Minister May, who had gambled on securing a landslide majority. In the event she is left nursing a fragile minority government with the support of Northern Ireland’s Democratic Unionist Party. She has a weak mandate, to say the least, and somehow has to respond to the message sent by the electorate that it appears to favour a “softer” form of Brexit and an end to years of austerity. Challenging and uncertain times lie ahead. 

The news was better in the Netherlands and France, where extreme right wing candidates were defeated in national polls. The elevation of Emmanuel Macron to the presidency of France is nothing short of phenomenal, in light of his relative inexperience and the fact that his party was just a year old. Given that Germany’s Chancellor Angela Merkel appears destined to retain her position in September’s election, reports of Europe’s demise appear to have been premature, although we still have an election in Italy to contend with before May 2018.

Read more

Investment Commentary, Investments, DFM