More positive on Europe, bonds outlook negative, and neutral view on property
We remain confident that the global economy should continue to provide conditions that are positive for share prices, at least for the next couple of months.
Our preferred equity investments are unchanged from last month, favouring Europe (excluding the UK) and Japan. In Europe, economic data remain upbeat and supportive for company profits. In addition, the euro was slightly weaker over the past month, and we suspect it may come under further negative pressure. This potentially benefits the profits of European exporters, as a lower euro can make their products cheaper in overseas markets.
Japanese stocks performed particularly well in October, and Japan remains one of our preferred equity markets. Prime Minister Abe's re-election reinforces support for his economic reforms, which are often referred to as “Abenomics”. In addition, improving economic data signal a more positive outlook for corporate profits among Japanese companies.
The main concerns we have about equities are within the US, where share prices look expensive, and the UK, as there is the potential of negative economic consequences to develop as the country leaves the European Union.
The outlook for government bonds remains clouded by the prospects of rising inflation and higher interest rates. This is because cash deposited in an interest-paying savings account, for example, can benefit from an increase the interest rate paid to investors as underlying interest rates rise, while most bonds make a fixed payment to investors regardless of changes in the interest rate.
For this reason, our outlook for bonds remains negative, especially in Europe, where the yield offered by some government bonds is close to zero.
We also think that corporate bonds (i.e. those issued by companies) in most countries are expensive and offer limited returns.
Our outlook for property remains the same. The uncertainty that surrounds the UK’s departure from the EU is likely to persist for some time, yet demand from overseas buyers remains strong. In part this is because UK assets have become cheaper because of the fall in the value of sterling. Despite clear evidence of falling rents for London offices, overseas investors’ interest in “trophy” buildings in central London is undiminished.
Meanwhile, industrial properties remain popular. Rental growth in this area of the market is above long-term averages and is expected to remain so. The structural shift to online sales is driving demand for industrial properties, especially in urban areas where limited land restricts supply.
Forecasts of future performance are not a reliable guide to actual results in the future, neither is past performance a reliable guide to future performance. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed. Any views expressed are our in-house views at November 2017. Investment markets and conditions can change rapidly and the views expressed should not be taken as statements of fact nor relied upon when making investment decisions. This information may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.
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