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Summary

We maintain our view that the global economy and corporate environment are in good health

2 min read

Global economy should stay strong

Despite the market turmoil that has been hitting the headlines, we maintain our view that the current global economy and corporate environment will continue to support equities in the medium term.

Worries about inflation and interest rates rising faster than expected in the US and the UK were no doubt behind some of last week’s volatility, but there have also been more short-term, technical factors at play.

While this is clearly a concern for investors, it is important to focus on the longer-term fundamentals and the health of the global economy, of which the US plays a dominant role.

A US recession usually heralds a wider sell-off and we do not see one on the horizon this year. We look at a number of factors to assess if such a recession is on its way, including the country’s financial conditions, the profitability of its companies and its position in the business cycle.

All these factors currently show a US economy in good health – and that is good for the worldwide economy.

The stock market falls so far are in line with what we’ve seen before. It was never to be expected that last year’s exceptional performance, without any meaningful declines, would last forever. Last year was very good for equities and US equity markets began 2018 with the strongest January performance in 30 years. It’s therefore not a huge surprise that investors might choose to bank some of their profits.

It’s also worth remembering that we have seen an unusually long period of very low market volatility – something many investors have become used to, making the sell-off seem more unusual than it actually was. 

“For investors looking to preserve and grow the value of their wealth over the long term, perhaps for the next generation, equity investing remains an important component of any wealth strategy.”

For investors looking to preserve and grow the value of their wealth over the long term, perhaps for the next generation, equity investing remains an important component of any wealth strategy. Historically, equities have been the only major asset class to provide returns over and above inflation, helping investors to maintain the real value of their wealth.

Being patient during times like this, focusing on the long term and having the reassurance of a professional investment team are important.

 
The benefits of diversification

The highly diversified nature of Coutts portfolios and funds has helped cushion our clients’ investments from much of the stock market volatility so far.

There are two key reasons for this.

Firstly, as well as equities, we invest in a range of other asset classes including fixed income and alternative investment strategies. At the time of writing, there was no meaningful contagion of the recent sell-off to those other assets.

Secondly, our portfolios and funds have been positioned relatively defensively for some time. Since 2016, we have slowly reduced our exposure to risk assets by about 10% in a typical balanced portfolio, focusing instead on areas where we see attractive growth prospects backed by robust research. Those areas include technology and healthcare, as highlighted in our 2018 investment outlook Investing through disruption.

We are continuously looking at opportunities created by the volatility and have already taken advantage of the fall in UK equities to raise our exposure to the UK from underweight to neutral at what we see as discounted prices. We continue to focus on high-quality, FTSE 100 companies that are well positioned to participate in continued global growth.


Is that a hawk we hear on Threadneedle Street?

The Bank of England (BoE) has kept interest rates at 0.5% but adopted a slightly more hawkish tone than previous announcements, indicating a rise could happen earlier than expected.

Coming as they did in a week of market volatility, the bank’s comments further fuelled investor concern about rising gilt yields. But as well as raising the prospect of higher rates, the BoE lifted its growth estimate to 1.8% from 1.7% and talked about wage growth picking up – both of which suggest a healthy economic backdrop.

Interest rate rises are generally not good for gilts and we retain our view that they are currently unattractive. We have held a low allocation to them for some time.

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About Coutts Investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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