Our asset allocation view
The Charles Stanley Investment Strategy Committee met to review markets and the economic outlook. Here are its conclusions.
Charles Stanley’s Investment Strategy Committee met to review the outlook for world economies and markets. The Committee confirmed its twelve to eighteen-month view of continued moderate growth worldwide with low inflation in the advanced world and very low interest rates.
The manufacturing downturn we predicted has come to pass and will take time to clear. Meanwhile, the US and China still enjoy decent growth in employment, incomes and consumer spending, whilst the EU should manage a positive growth rate overall, with a few countries flirting with recession.
The emerging market world is held back by the general lack of buoyancy worldwide but should achieve a faster pace of growth than the developed world over the year ahead. The Committee did not make any changes to recommendations on individual asset classes, given the lack of change on the general outlook.
The Committee asked itself what are the main risks to this central case? There are those in markets who think ultra-low bond yields and lower rates for longer-term loans than shorter term loans in some cases heralds a recession. The Committee think the interest rates reflect a general assumption that official short rates will fall further, after several months of rate reductions from many countries. The Committee thinks we may have seen the best of the rate cuts, but there could still be a bit more to go for as the Central Banks are determined not to allow a downturn. None of this implies recession, which usually comes about when Central Banks raise rates to stifle inflation.
The attack on the Saudi oil installations recently reminded us of the vulnerability of world oil supplies to wars in the Middle East. The cautious response of both the US and Saudi Arabia to the attacks served to calm markets. Both countries promised to draw on their large stocks of oil to avoid too high a spike in oil prices, and Saudi moved quickly to repair damage. Our base case assumes the US will wish to avoid a major war in the Middle East, and damage done from local wars will remain containable.
The Committee recognises that the forecast period includes the run up to the Presidential election in late 2020. Mr Trump may well be able to win a second term. His Democrat opponent is likely to be in favour of higher taxes, more regulation and more commitment of the US to world green policies, whichever of the front runners emerges as the candidate.
Given the extent of the fiscal and monetary relaxation undertaken by President Trump, it is difficult to see a Democrat President could do much more by way of fiscal expansion. They are more likely to raise taxes on rich individuals and companies to increase spending on their priorities. If it appears the Democrats might win markets would start to discount tax and regulatory changes that are averse to large corporations in areas from technology to pharmaceuticals and energy.
The ISC is studying the programme of the new EU Commission set out by the President elect. There will be a strong emphasis on green transition, with tougher targets for moving to carbon neutrality by 2050. The intermediate targets for 2030 will mean the need to take further action on diesel and petrol cars, on aviation and shipping, and on home heating. The car industry, centred on Germany, will need to spend more on a rapid transition to electric cars against a background of customer uncertainty about what new product to buy. The EU will diverge more from the US, which under President Trump favours cheap oil and gas and the continuation of the carbon based transport and heating systems.
The Committee does not expect an early comprehensive resolution of the US/China disputes. There may be some settlement of some of the outstanding tariff issues which are damaging both sides, but it seems Mr Trump has decided on a longer-term tougher relationship with a China seen as a major challenge to the West. The central case assumes no major deterioration in the trade row from here. There is a danger that the US will also extend the trade war to the EU, demanding lower tariffs on US cars into the EU under threat of higher tariffs on cars into the USA.
The Committee expects more moves to fiscal relaxation in various countries. In the EU, there are pressures to allow more spending across the zone. India is embarking on lower corporate taxes. China has offered tax cuts and some spending rises. The UK has announced higher public spending for next year, whilst the US budget deficit has been boosted by both tax cuts and spending rises.
The environment is one where shares look cheaper than bonds, and where there is still scope to earn some positive returns from share investment.
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John Redwood is Chief Global Strategist at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.