Critically for financial investments, monetary policy remains supportive in most regions. Negative interest rates have been introduced in the eurozone and Japan, and both the European Central Bank and the Bank of Japan are sustaining their policies of quantitative easing. Even in the USA, the Federal Reserve has indicated that any further interest rate rises are likely to be very gradual.
The timing and nature of the UK’s withdrawal from the EU is unclear. The UK government faces difficult political decisions. A hard choice will have to be made between access to the single market and any refusal to accept the principle of the free movement of labour. A similar dilemma is evident between remaining in the European customs union or having the ability to negotiate bilateral trade deals with third parties. Negotiations are likely to be complicated by the elections in Germany and France next year. In these circumstances, the ultimate impact of the decision for the UK and eurozone economies is difficult to assess.
In the USA, Donald Trump has won the presidential election. Here too, there is considerable uncertainty about how the rhetoric of his campaign will translate into practical policy, but any move towards protectionism would be likely to damage global economic prospects. For now at least, data for US business and consumer sentiment have been positive and unemployment continues to be low. Yet US equity market valuations seem stretched given the muted prospects being expressed by corporate America.
In Asia, the outlook has improved. Growth has accelerated in countries such as India, Indonesia and the Philippines and the picture in China is brightening. By contrast, conditions are still difficult in Japan where the strength of the currency is beginning to stifle recovery expectations.
Equity market valuations remain quite demanding and may come under further pressure, should political anxiety intensify. Nevertheless, the world is not in recession and short-term weakness might throw up good long-term investment opportunities, particularly in smaller companies, which can be marked down indiscriminately in the short term. Against this very confused background, it becomes more important than ever to maintain a well-diversified portfolio.
McInroy & Wood believes long-term investment in smaller companies can be particularly rewarding. Over the past 30 years, global investment institutions have come to dominate equity markets. Their buying naturally has been concentrated on the biggest and most liquid stocks, rather than smaller companies, however attractive the values and prospects of the latter may be. As a specialist private client firm, McInroy & Wood is much less hampered by liquidity considerations in its investment selections, and is in a strong position to exploit opportunities in the smaller company sector on behalf of its clients.