Although markets have continued to be fairly lacklustre in recent months, economic growth remains st...
Although markets have continued to be fairly lacklustre in recent months, economic growth remains strong and is likely to be well above trend in the final quarter.
In the US, the authorities have become more sanguine on the economy due to continued signs that growth is slowing and figures are now pointing towards a soft landing.
Consequently, no changes in interest rates are expected until after the presidential elections and only a small rise is predicted thereafter. However, due to concerns centring on the oil price, on imbalances in the current account and on the level of personal and corporate borrowing, it is still possible that rates will rise further.
In Europe, fears are increasing that the European Central Bank may be over-tightening, following the recent succession of rate rises. Inflation is rising in some of the Euro-zone countries but this is due to the level of the oil price which has yet to feed through to inflation in other areas of the economy. Domestic demand is not exactly strong in most countries and economic growth is being driven largely by high export levels.
The euro continues to be disappointingly weak against the dollar and we believe it is fundamentally undervalued at these levels. We are therefore increasing our weighting in this area as opportunities arise.
Against a background of rising interest rates and continuing disappointing results, we have been underweight in the UK so far this year. The inflation outlook does seem to be relatively benign and interest rates are close to their peak, but the dull growth outlook means it is the defensive stocks which have been performing best, whilst cyclical sectors continue to be weak. We believe there are currently some more exciting opportunities in other markets of the world and therefore continue to be underweight in the UK.
The news from Japan has improved over the last few months. Consumer confidence seems to be rallying and the recent interest rate rise now appears to have been accepted by the markets as an appropriate response to an improving economic outlook. Restructuring is taking place and company results have exceeded expectations. We have therefore moved to an overweight position in Japan.
Emerging Markets had been heavily correlated with Nasdaq in recent months and there was always a strong likelihood that they would suffer on the downside in times of global market turbulence. This has certainly been the case in Asia where semiconductor stocks in particular have been badly affected by the poor news flow in the sector, but these stocks now look oversold and we therefore expect a recovery in due course. The best economic growth story in the area is China, which is at a more attractive stage of the economic cycle than other regions.
Alice Ryder is a fund manager at Framlington
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From 6 April 2019