2) looking beyond the headlines on europe
UK events are obviously just one consideration for global investors – for us, the US and Chinese economies, and US interest rates, are actually far bigger drivers for our portfolios and funds. It’s therefore important to look beyond British borders.
Take Europe, for example. The region is facing its own challenges, with business confidence in Germany sinking to a seven-year low and political volatility weighing on the Italian economy.
But look a little deeper and opportunity could be waiting in the wings.
The potential for economic recovery we’re currently seeing in China, if it continues, should have a positive knock-on effect for Europe as the two have such a strong trading relationship. China is the EU's biggest source of imports and second-biggest export market, according to the European Commission. Trade between China and Europe amounts to €1 billion a day on average.
Like the rest of the world, growth in China has been slowing and markets had priced that in. But recent data points to its economy stabilising and potentially even picking up a little, despite the ongoing trade war with the US. The Chinese government has been actively increasing spending and introducing tax cuts to aid the economy.
Because of these developments, we’ve increased our allocation to European stocks, taking them back to a neutral position.
Lilian says, “There are strong connections across the global economy and stock markets. It’s our job to spot them and act on the opportunities that arise from them. And if China’s recovery continues, that will be good for Europe and good for European companies. The trade war is of course a concern for China, but it should help that the country has become more reliant on domestic demand rather than global trade over recent years.”
3) keeping a close eye on bonds
Bonds on both sides of the Atlantic have delivered solid returns so far this year. As at 31 August, the Barclays UK Treasury Index returned 11.3% in local currency terms, while the US equivalent returned 8.6%.
A word of warning though. US Treasuries and UK Gilts are in different places right now, once again due to the Brexit-related uncertainty.
“Using our in-house economic indicators, we foresaw that interest rates would fall in the US in light of slowing growth, making the country’s government bonds attractive,” says Lilian. “That’s exactly what has happened since the beginning of the year and our portfolios and funds benefitted."
“But in the UK, the Brexit process can drive Gilt prices in both directions independently of their more traditional economic drivers. That makes UK government bonds harder to evaluate, which is a key reason why we have recently favoured US Treasuries over UK Gilts in our portfolios and funds. And given the recent political developments and potential election, we think this rationale is still the right one.”
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