The state of the world economy remains reasonably positive for investment prospects. Generally GDP growth and corporate profits are holding up well. Interest rates look set to be raised at a measured pace as central banks unwind stimulatory policies. However stock valuations seem stretched in some markets, and political uncertainty in the USA, UK and Europe continues to disconcert investors.
The prospect of a global trade war is a major concern. President Trump's 'America First' policy is likely to prove very harmful to cross-border commerce. Higher US tariffs on selected imports have already triggered retaliation from other countries. Although only a few sectors have been involved to date, extensive damage to the international trading system cannot be ruled out.
Nevertheless, the US economy is in vigorous health, recording 4.1% growth in the second quarter. Unemployment has touched its lowest level since 1969. Against this background, the Federal Reserve is almost certain to raise interest rates further this year, although it has indicated that it expects that this will be a gradual process. At present, real wage growth remains restrained but recent tax cuts may put upwards pressure on bond yields and, by extension, interest rates overall.
There is still little clarity over the likely outcome or implications of Brexit negotiations. Deep divisions cut across the UK political spectrum on the issue. Meanwhile, there are increasingly shrill warnings from UK companies of the impact on business in an already lagging economy.
The eurozone is expected to grow a further 2% this year, despite a recent slowdown in new orders and a decline in business confidence. With underlying inflation still below 2%, the European Central Bank is set to move cautiously in unwinding its accommodative policy, particularly when the Italian government has pledged to defy the currency union's fiscal rules.
Despite short-term pressures from rising energy costs, India and China are growing much faster than Western economies. However developing markets are vulnerable to a strengthening of the US dollar and, of course, to any widespread imposition of tariff barriers. Elsewhere, political concerns are impacting Turkey and Latin American countries, and the resulting sharp currency movements and falls in asset values may prove contagious for other financial markets.
Portfolio allocations reflect a degree of caution and include a weighting in gold. Corporate results have been upbeat but valuations remain high, while bond yields are still at historically low levels. Political developments, particularly on the trade front, could easily upset market sentiment. At the same time, the prospect of further rises in interest rates is likely to add to uncertainty among investors.