The portfolio is cautiously positioned. Prospects for the world economy have deteriorated, exacerbated by persistent trade tensions. Many investors believe interest rates will be lowered. However, where rates are already negative, central banks are likely to consider more unorthodox, and less predictable, stimulus measures. Miscalculations could have severe ramifications, particularly if as a result widespread expectations of falling rates prove misplaced.
In the US, there are grounds for optimism, with consumer spending supported by low unemployment rates and real wage growth. Any slowdown would undermine President Trump's re-election campaign, which will be tied to the prosperity of the country. Political pressures on the Federal Reserve are set to intensify while government expenditure is likely to increase. Trade negotiations between the US and China continue. Despite little progress to date, some accommodation may be possible. Falling demand and a strong dollar have hurt US farmers, a strong support base for President Trump. They may push their government towards a compromise, particularly if the election looks set to be very tight. Much of this is, however, reflected in expensive valuations, which look vulnerable if investors’ high expectations are not met.
The UK’s short-term investment outlook has improved, as the Conservative’s election victory removed a threat to business prospects and the immediate risk of a no-deal Brexit receded. Nevertheless, the nature of Britain’s eventual trading relationship with the EU remains unclear. Productivity growth continues to disappoint. However, consumers enjoy record low unemployment, rising real incomes and cheap credit, and some sectors have proved resilient even if they would be vulnerable to a general slowdown.
The outlook for the eurozone has worsened. German exports have fallen, and economic sentiment slumped to levels evident during the financial crisis. Trade between member states contracted at its fastest rate for over six years in June. Meanwhile, the European Central Bank's scope for stimulatory responses is constrained.
Long-term prospects for emerging markets remain promising, although the immediate outlook appears difficult. This partly reflects a general slowdown in mature economies but there are also changes to structural trends, namely rising western hostility to globalisation of production. Nevertheless, growth in China and India still outstrips that of developed economies. Stock selection in developing markets emphasises family-controlled businesses with long-term strategies.
Government spending may be necessary to spur economic growth and will, in many countries, require further borrowing. Though inexpensive by historic standards, the proportionate level of government debt to GDP has never been higher. It has almost doubled since 2007. Even the most reputable treasuries may find their credentials tested.
Investors have traditionally fled to the safety of real assets when trust in financial assets and cash falls; gold has historically been a store of value during these periods. Its role in the portfolio is threefold: to provide some protection against sharp declines in equity markets; to offer diversification; and to insure against a collapse in global confidence (perhaps even in national currencies).
A focus on high-quality companies with soundly based business positions remains essential in present circumstances. A portfolio of such companies, buffered by a selection of shorter-dated and floating-rate bonds, and an allocation to gold, should continue to provide satisfactory returns in the medium term.