Bright economic outlook maintains benign markets
September 11, 2017

The outlook for the global economy continues to be positive, according to Joe Batarseh, Portfolio Manager, Coutts in a newly published briefing note. As a result, markets were benign in spite of short volatility spikes that occurred due to geopolitical events. The MSCI World Index stayed fairly flat in local currency terms, rising 0.4 percent, while for sterling it rose 2.7 percent because of the currency's weakness. UK gilts returned 2.1 percent.

Making a recovery

Bank of England governor Mark Carney cited Brexit uncertainty as one of the key reasons behind the squeeze on UK household incomes and consumer spending. The central bank downgraded the country's growth forecast from 1.9 percent to 1.7 percent for 2017 in its quarterly inflation report and held interest rates at 0.25 percent. Meanwhile the Consumer Price Index came in at 2.6 percent – lower than the expected 2.9 percent – and sterling hit an eight-year low against the strengthening euro.

While there remain short-term fears about UK equity following the EU referendum, it's worth remembering that the FTSE 100 generates about 80 percent of its revenue from outside the country. We therefore believe UK equities will continue to be supported by the robust global economy. The eurozone's recovery continues to gather pace, with the bloc's economy expanding by 2.2 percent year-on-year in the second quarter – its fastest rate of growth since 2011.

The euro has surged, rising almost 5 percent against a basket of currencies since the middle of May. A strong euro creates a problem for the ECB though as it looks to start trimming back its 2trn quantitative easing programme. It could also complicate the bank's efforts to hit its inflation goal of just under 2 percent by making imports cheaper and exports less attractive outside the region.US economic growth remains solid, expanding at an annualized rate of 3 percent in the second quarter as consumer spending increased.

This marked its strongest growth in more than two years, says Batarseh. Despite some Federal Reserve policymakers voicing concerns over weak inflation, most commentators expect an announcement on balance sheet normalization at the Fed's September meeting and a third rate increase this year in December. Meanwhile, the dollar has fallen by more than 9 percent this year as uncertainty around the Trump administration persists.

Focusing on long-term opportunities

He argues that the outlook for global equities remains positive against the backdrop of a buoyant world economy. "We believe equities provide the potential for better long-term returns than bonds and think that, while US equities remain relatively expensive, European and Japanese stocks offer more attractive valuations," he says. "Within bonds, we see corporate bonds and emerging market local currency debt providing better opportunities than developed market government bonds, which are vulnerable to rising interest rates and inflation.

"We believe alternative investments – such as UK commercial property and absolute return strategies – offer better potential returns than bonds but similar diversification benefits. We are positive on UK commercial property as economic growth continues to be supportive and Brexit risks are discounted in the price. Recent overseas purchases of large London office blocks would appear to support this view.

"We are less positive on commodities. We see limited upside for gold in a rising interest rate environment and are broadly neutral on oil. Despite an agreement among the OPEC nations to reduce oil production at the start of the year, we still see oversupply as an issue. Although the outlook for the global economy is brightening, we remain aware of potential risks.

"President Trump has yet to provide clarity on his fiscal and trade policies, while his recent move to impose sanctions on firms with alleged links to North Korea has increased tensions between the US and China. Also, elections are approaching in Germany, although all current indications are that Angela Merkel will remain chancellor, and Brexit negotiations are ongoing," he concludes.





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The outlook for the global economy continues to be positive, according to Joe Batarseh, Portfolio Manager, Coutts in a newly published briefing note. As a result, markets were benign in spite of short volatility spikes that occurred due to geopolitical events. The MSCI World Index stayed fairly flat in local currency terms, rising 0.4 percent, while for sterling it rose 2.7 percent because of the currency's weakness. UK gilts returned 2.1 percent.

Making a recovery

Bank of England governor Mark Carney cited Brexit uncertainty as one of the key reasons behind the squeeze on UK household incomes and consumer spending. The central bank downgraded the country's growth forecast from 1.9 percent to 1.7 percent for 2017 in its quarterly inflation report and held interest rates at 0.25 percent. Meanwhile the Consumer Price Index came in at 2.6 percent – lower than the expected 2.9 percent – and sterling hit an eight-year low against the strengthening euro.

While there remain short-term fears about UK equity following the EU referendum, it's worth remembering that the FTSE 100 generates about 80 percent of its revenue from outside the country. We therefore believe UK equities will continue to be supported by the robust global economy. The eurozone's recovery continues to gather pace, with the bloc's economy expanding by 2.2 percent year-on-year in the second quarter – its fastest rate of growth since 2011.

The euro has surged, rising almost 5 percent against a basket of currencies since the middle of May. A strong euro creates a problem for the ECB though as it looks to start trimming back its 2trn quantitative easing programme. It could also complicate the bank's efforts to hit its inflation goal of just under 2 percent by making imports cheaper and exports less attractive outside the region.US economic growth remains solid, expanding at an annualized rate of 3 percent in the second quarter as consumer spending increased.

This marked its strongest growth in more than two years, says Batarseh. Despite some Federal Reserve policymakers voicing concerns over weak inflation, most commentators expect an announcement on balance sheet normalization at the Fed's September meeting and a third rate increase this year in December. Meanwhile, the dollar has fallen by more than 9 percent this year as uncertainty around the Trump administration persists.

Focusing on long-term opportunities

He argues that the outlook for global equities remains positive against the backdrop of a buoyant world economy. "We believe equities provide the potential for better long-term returns than bonds and think that, while US equities remain relatively expensive, European and Japanese stocks offer more attractive valuations," he says. "Within bonds, we see corporate bonds and emerging market local currency debt providing better opportunities than developed market government bonds, which are vulnerable to rising interest rates and inflation.

"We believe alternative investments – such as UK commercial property and absolute return strategies – offer better potential returns than bonds but similar diversification benefits. We are positive on UK commercial property as economic growth continues to be supportive and Brexit risks are discounted in the price. Recent overseas purchases of large London office blocks would appear to support this view.

"We are less positive on commodities. We see limited upside for gold in a rising interest rate environment and are broadly neutral on oil. Despite an agreement among the OPEC nations to reduce oil production at the start of the year, we still see oversupply as an issue. Although the outlook for the global economy is brightening, we remain aware of potential risks.

"President Trump has yet to provide clarity on his fiscal and trade policies, while his recent move to impose sanctions on firms with alleged links to North Korea has increased tensions between the US and China. Also, elections are approaching in Germany, although all current indications are that Angela Merkel will remain chancellor, and Brexit negotiations are ongoing," he concludes.




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