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Market View for October 2018

Although the US economy continues to grow strongly, at a rate of more than 4% per year, other countries are struggling to keep up.

Outlook

We continue to prefer equities to bonds, although we have made some small changes to our forecasts based on the worsening economic outlook.

Although the US economy continues to grow strongly, at a rate of more than 4% per year, other countries are struggling to keep up. Although still growing, economies in Europe, Japan and parts of Asia are not growing as rapidly as we predicted a few months ago. This is due to the imposition of trade tariffs between China and the US, which is raising the prices of goods in both countries, thereby leaving consumers with less to spend.

Furthermore, the rate of US economic growth could wane next year, as the effects of interest rate rises are felt. The Federal Reserve (the US equivalent of the Bank of England) is increasing rates to prevent inflation from rising too quickly. Higher interest rates make it more expensive for consumers and companies to borrow money. This reduces the amount they have available to spend or invest, thereby supressing economic growth.

Growth may slow

Slower economic growth could have a negative effect on company profits and therefore share prices. For this reason we have become slightly more negative in our outlook for equities and a bit more positive towards government bonds, especially in the US. Bonds are often popular during times of slowing economic growth, as they provide a comparatively reliable income. Government bonds can be especially popular among investors, as governments rarely fail to make the payments that are due (known as a ‘default’).

Asia markets unloved

Concerns about the trade dispute between China and the US have had a negative effect on shares in other parts of Asia in recent months. This is because China is such an economic powerhouse within the region that any downturn in its economy could have a detrimental effect on neighbouring countries.

Investors have therefore been wary of shares in these countries and prices haven’t kept pace with those of other markets, most notably the US. We think that shares in some of these Asian markets could recover and rise to reflect companies’ true values.

US bonds better value

Although we have become more positive on the outlook for bonds, this only applies to US government bonds, which provide a yield of around 3%, compared to yields of around only 0.5% in Germany. We remain pessimistic about the prospects for bonds issued by companies, which are expensive, and we expect prices to fall from their current levels.

Mixed outlook for property

The outlook for property is positive, but could be affected by opposing forces. On one hand, warehouses and distribution centres are much sought after, particularly by companies with e-commerce operations, but demand for high-street retail properties is very weak. There is strong demand for UK commercial property from overseas investors, who are finding it cheaper to buy property following the fall in the value of the pound against other major global currencies.

Important Information

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 October 2018. 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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