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.

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.

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.

Elsewhere, Japan still wrestles with deflation despite a cocktail of stimulatory measures. An ageing population restricts domestic growth, while exporting businesses suffer from the strong yen. Yet the country has so far avoided recession and is home to companies with world-leading products.

We believe long-term investment in smaller companies can be particularly rewarding. Over the past 30 years, global investment institutions have come to dominate equity markets. This trend has been reinforced by the growth of large passive investment funds whose aim is simply to track market indices. Institutional 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.