Simon’s Market View – July 2017

Markets have had a reasonable start to the year with FTSE All Share up 2% and US S&P 500 up over 6%. One could regard this as surprising bearing in mind the number of uncertainties overhanging the world economy. Much of this gain is based on real earnings of companies, with the main economic blocks growing in unison with the rise of the oil price only a minor factor. However, there is no doubt that markets do not like uncertainty and therefore we are adjusting our portfolios to be more defensive. New investors may find that phasing money into portfolios is a sensible approach.

One year on from the Brexit vote and what has changed:

On the good side we have not seen the promised recession yet, UK growth is still at 1.8%, with unemployment having fallen from 4.9% to 4.6%. So no economic disaster!

However, the vast majority of this growth has been household consumption. With inflation running at 2.9% at the end of May and regular wages increasing at 1.7%, it’s not easy to see where sustainable growth will come from as households will be starting to feel worse off. With Sterling still some 15% down on the Dollar and 10% down against the Euro, I’m not expecting inflation to fall back just yet, but it may well do so as living standards fall. It’s this weakness in the economy that will probably mean no significant interest rate rises for some time to come. Inflation could easily hit 3.5% by the next statistics due considerably ahead of the Bank of England’s 2% target.

The recent general election clarified nothing, but it has a silver lining. Although Brexit was not at the top of most voters’ minds, by denying the government a sweeping majority they have prised open the stranglehold that a narrow group was exerting over discussion of our options. We have a new opportunity for thoughtful debate about what form of Brexit we should pursue (source Financial Times).

Clearly the main issues facing the economic world at present are political. The Brexit vote in the UK followed by the election of Donald Trump as president of the USA last November has obviously dominated headlines. This has been followed by an election in the UK delivering a minority government. But don’t forget that we have also had elections in Netherlands and France and there is an important one in Germany coming up. So far these have given evidence of a general shift to the right and disenchantment with the establishment, politically. From an economic view, this could see a rise in protectionism reducing global trade. Possibly the less unexpected result from Holland recently, where the moderate President was re-elected and the perceived right wing challenger was well beaten into 2nd place, indicates that future extreme results may not be as likely.  The French election also saw the moderate candidate returned, but Marine Le Pen still managed to double her father’s vote.

The initial impact of these events has seen the Pound fall by approximately 15% against the Dollar and slightly less against the Euro. While this indicates a lack of faith in the UK economy, generally, it has had advantages. Approximately 75% of income generated by FTSE-100 companies and 45% by mid-250 companies come from abroad and this has helped buoy markets and predicted market falls have not happened so far.

Overall, while we expect this to ultimately create volatility, it can also create opportunities for good investment managers.

Because of the uncertain future that we are facing in investment markets, at Tarvos Wealth, we felt that we needed to reconsider how we manage our investment portfolios. To this end, we are partnering with some of the best respected fund research and investment companies in the city to ensure that our clients receive the best quality of active investment management in the future.

Our partners believe, as we do, that portfolios should be managed to minimise risk even if that means missing some of the upside if markets go up. However, they will be in a better position than us to take advantage of market fluctuations, which in themselves create opportunities.  Portfolios will remain fully diversified and suitable to each client’s attitude to risk and will be managed to our mandate. We believe that this is an exciting development for Tarvos Wealth and will put us to the forefront in managing clients’ assets.