Political uncertainty is weighing on investment prospects, even if the state of the world economy is otherwise reasonably encouraging.
The USA’s direction under a Trump Presidency remains open to question. His pledges for tax cuts and massive infrastructure spending may be more difficult to implement than some investors initially anticipated, leaving companies with optimistically high valuations vulnerable. Nevertheless, growth in the US economy seems solidly based; for now at least, business and consumer sentiment have been positive and unemployment is low.
The UK and Europe, too, face considerable political uncertainty. There is still no framework for the future relationship between the UK and the eurozone and negotiations are likely to be complicated further by the results of the UK's general election. In these circumstances, the ultimate impact of ‘Brexit’ for the UK and eurozone is difficult to assess. While the UK economy has been performing relatively strongly, consumer spending is likely to be impacted by the lack of growth in real incomes. However the economic outlook in Europe has improved with a modest increase in inflation and a pick-up in manufacturing activity.
In Asia, expectations have brightened. Growth has accelerated in countries such as India, Indonesia and the Philippines, and the picture in China is brightening. Japan remains home to some excellent companies with strong market positions, even if the overall success of the much-touted ‘Abenomics’ programme continues to be debatable.
Monetary policy remains supportive for investment in most regions, with central banks retaining accommodative stances in the UK, Japan and Europe. Even in the USA, the Federal Reserve has indicated that any further interest rate rises are likely to be gradual.
Elevated equity valuations give rise to some concern, particularly in the USA, and look vulnerable to any delay or legislative difficulties in implementing the eagerly anticipated tax cuts. Meanwhile rising inflation could further unsettle bond investors, and possibly equity markets too. Against this background, we continue to favour a relatively cautious approach based upon a wide diversification of investments, both by region and asset class, including some allocation to gold.