Summary
In our quarterly report we look at the political and economic influences which have driven markets over the second quarter.
5 min read
Normally we spend time as investors thinking about where we are in the economic and business cycle. As well as these considerations, at this time there are some greater political and structural influences that seem to be almost unprecedented in their scope and importance.
The UK government is as unstable as it has been in 40 years and its economy is flirting with recession. Sterling’s value doesn’t lie and is importing inflation that is already hitting consumer living standards. The potential boost it offers exports could prove fleeting in the midst of post-Brexit uncertainty. Global security risk is high.
The financial crisis is almost a decade behind us but its aftershocks reverberate still almost everywhere we look. Or, probably more accurately, the reverberations of the trends that brought us the crisis have still to work their way out of the economic and political system. Four employees of Barclays, including ex CEO John Varley, have been charged in late June with fraud around the time of the bank’s bailout.
Political choices are for the first time being driven more by age and generation rather than class, demography or geography, at least in part. Consent for the economic and political system we have depended on since the war can no longer be taken for granted. It is remarkable. But in all moments of noise and confusion there is both risk and opportunity. At Adam Investment our advice is always to plan for the long term rather than worry about being buffeted by short-term factors. That said, distinguishing between short term noise and fundamental shifts has never been more important.
The second quarter of 2017 began with Theresa May invoking Article 50 and formally signalling Britain’s intention to exit the European Union. It ended with a weakened Tory party signing a supply and confidence deal with the DUP in order to enable a more legislatively limited Queen’s Speech to be made. This is the least stable government since the 1970s embarking on the most important negotiations since the Second World War.
“Sterling’s value doesn’t lie and is importing inflation that is already hitting consumer living standards.”
The outlook for trade is uncertain, particularly as some governments have talked about taking a more protectionist stance.
This is against a backdrop of high levels of geo-political uncertainty, especially and unusually in developed markets. Companies, financial institutions and governments are battling high levels of ever more sophisticated cyber crime. The political ‘elite’ suffered some shocks over the last eighteen months and in turn is pursuing internet and social media giants they hold partly responsible. They are being taken to task over tax and conduct – witness Google’s EUR2.4bn fine announced by the European Commission. However, as investors we must not forget that technology also brings opportunity to fight climate change and poverty, and bring automation and robotics to ever more applications.
How do we, as long term investors, think about all these factors, as well as thinking of the economic cycle? Equity markets have remained reasonably robust over the quarter as many company earnings have met or beaten expectations. We seek companies that we think will continue to allocate capital in sensible ways and invest in structural trends, whilst keeping clients aware that there is, of course, investment risk as always.
A background of synchronised global growth in all major regions has led central bankers in the US, EU and UK to discuss raising interest rates. The rates roller-coaster has clearly taken summer markets by surprise. Central bankers, whether inadvertently or deliberately, have introduced a significant amount of volatility into the markets. Inflation and jobs data released over the next few months will be particularly scrutinised. We stay underweight fixed income.
We maintain our view that equities remain the best hedge against inflation, and stay overweight. We are cautious that some of the excellent returns we have seen so far this year – the MSCI Global Index has had its strongest start since 1998 – may not be repeated in the second half, making it more important than ever to be selective in the stocks we buy and hold for clients.
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Asset Class
Review
Second Quarter 2017
KEY TAKEAWAYS
The second quarter of 2017 began with Theresa May invoking Article 50 and formally signalling Britain’s intention to exit the European Union. The outcome of Brexit negotiations is as uncertain as ever, particularly in light of the General Election result. At Adam Investment we continue to take a long term, diversified approach to investing on behalf of our clients.
About Adam investments
We offer discretionary investment management to individuals and their families, and to charities. We take a long term approach to investing and we believe this gives us an advantage in a world where markets and media are increasingly focused on short term news.
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