The Investec in-house Research Team looks back at what happened in the investment market during the first half of the year and ahead to the rest of 2016 and beyond.
The prospect of global political change
Politics looks set to affect market confidence across the globe for the foreseeable future. Before the US election, there will be a referendum on reforms in Italy, which is largely a confidence vote in the reforming Prime Minister Matteo Renzi. The anti-Europe Five Star Movement has already won mayoral elections in Rome and Turin. Looking to 2017, there are going to be general elections in France and Germany where large gains for right wing parties, like the National Front in France and Alternative fur Deutschland in Germany, could lead to further disruption.
Can any good come of this?
Public perception across Europe seems to be that the financial rewards of globalisation have gone to the few, not the many, which has given anti-establishment and anti-Europe parties an unwelcome boost. With current monetary policy failing to get growth moving, more quantitative easing is the next logical step for governments wishing to save their own bacon.
Current UK markets
Surprisingly, given the turbulent first half of the year, UK equities have still delivered a positive return to investors. Much of this is down to a weaker Pound following the Brexit vote. That’s because some three-quarters of the revenues of the UK’s top 100 companies are generated overseas, so a weaker Pound provides an export boost and an immediate currency conversion gain.
Mid and Small Cap companies have suffered, with greater exposure to the domestic economy. This is considered to be a greater short-term risk, but still with potential value for long-term investments.
Government bonds (or gilt) yields have been falling this year, with the UK 10-year gilt hitting an all-time low of just 0.86% following the Brexit vote. However, this is at least in positive territory, whereas almost $12 trillion of global government bonds now offer a negative yield, with the entire stock of Swiss debt now offering less than zero.
Keeping an eye on China’s market
Although we have recognised others’ concerns, we have been more positive than most on China, as we perceive that it is successfully managing the challenges of changing its economic model from being driven by exports and (often debt-fuelled) investment, to relying on domestic consumption. We will continue to monitor the situation, but continue to believe that, if left to its own devices it currently poses no immediate threat to investors. We do note, however, that China might become more assertive if an incoming President Trump were to put up trade barriers. So we will also be keeping a close eye on the outcome of the US presidential election.
Staying positive about emerging markets
Emerging markets have been helped by a reversal in the dollar and a rebound in commodity markets. They’ve also been free of bad news for some time, while developed markets have had all sorts of issues. We continue to hold the view that emerging economies offer better long-term growth opportunities for investors than developed economies.
To summarise, our stance has become progressively more cautious over the last six months. That is not to say that we are fearful of falling prices, more that we anticipate more timely opportunities to add to riskier assets such as equities and corporate bonds. We have entered a period where balanced portfolio returns are going to be somewhat harder to come by than they were for most of the period following the financial crisis, but we remain confident that the virtue of patience will be rewarded when it comes to investing.
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