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The Charles Stanley Investment Strategy Committee met to review markets and the economic outlook. Here are its conclusions.

The Charles Stanley Investment Strategy Committee met to review markets and the economic outlook. Here are its conclusions.

by
John Redwood

in Features

23.05.2019

At its meeting on May 23, the Committee reaffirmed its forecast of slower economic growth worldwide in 2019, without a recession. As expected, market fears of a slowdown turning into a downturn shocked the monetary authorities of the US, China and the EU into relaxing their words and their stance sufficiently to avoid a deeper decline in output. The US should grow by a little over 2% this year, China by more than 6% on the official figures, and the EU as a whole will be in positive territory.

Manufacturing is suffering with a sector recession in several countries, led by a weak global car market. Higher vehicle taxes in China and the UK, a tightening of car loan availability and higher interest charges in the US, and a big government drive worldwide to switch to electric cars have combined to damage sales. This has had knock on effects to component makers and raw material producers.

A slowdown expected

Donald Trump is having a big impact on world markets, which have responded each way to varying news on the US/China trade war. Bid up in April on expectations of a trade deal, markets have fallen back on news of 25% tariffs imposed on $200bn of Chinese exports to the US, and more recently on the ban on Huawei products in US and allies systems. Further attacks on trade could lower the world growth rate a bit more, but should not in themselves take the world into recession. The world’s main export economies, led by China and Germany, have lost orders and suffered reduced output from the more hostile trade environment and the general economic slowdown.

Interest rates are expected to remain low throughout the developed world. Japan and the EU will keep rates around zero, with Japan continuing a programme of bond buying through the central bank to anchor the ten-year rate at zero as well. The US is unlikely to raise rates again this year and may even have to consider a cut if the world trade is too disrupted. The Bank of England would like to raise rates again but there is little evidence to warrant such a change in current conditions. Inflation is expected to remain low in the advanced world. Price and wage rises are being kept down by global competition particularly in goods, and by continued growth in workforces in the countries that are expanding.

No change of view

The Committee did not make any changes to its recommendations on markets and asset classes. Bonds have done reasonably well this year so far. US government bonds offer better yields than the rest of the advanced world and have attracted money for this reason, whilst corporate debt has also fared well despite the slowdown in company profits growth. Bankruptcies have remained at a low level and most companies can afford their current debt levels thanks to low interest rates. The Fed has recently concluded that the sharp increase in some debts in companies is so far manageable for the system as a whole.

Share markets reached peaks in April, and have retreated since. The Committee thinks on a twelve to eighteen month view shares are still better value than bonds and returns should be positive. There could be a period of further weakness in the meantime as markets adjust to the lack of a good trade deal, to the absence of a follow through on monetary easing by any of the main central banks, and the continuing very competitive environment brought on by the digital revolution and world sourcing. It will take better news on trade or more positive action by governments and monetary authorities to promote faster growth to get more enthusiasm into share markets.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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