Although volatility has settled down from the violent end of 2018, global growth has moved into the slow lane and geopolitical uncertainties continue to drive the markets at higher-speeds. In the UK, assets remain unloved and, as the Brexit clock ticks, recent rallies in sterling suggest the market would welcome any sort of agreement that helps pave the way for leaving the European Union.
Despite the pressing March deadline, the Eurozone backdrop itself is ironically becoming more worrisome thanks to ongoing bilateral trade tensions and deteriorating economic data. Weaker Purchasing Managers’ Index readings (PMIs) since mid-2018 showed that European economies were losing steam and since the start of 2019 further macroeconomic data have proved that each country has its own reasons for the slowdowns; for example, yellow vests protests disrupting business activity in France and an unstable populist government still trying to hold up a fragile banking system and heavy debts (particularly household) in Italy. While in Germany, where the vitally important auto industry has struggled to adjust production with newer emissions standards and tariff costs, sharp declines in exports have suppressed its economy nearer to recession.
Overall, the economic malaise in Europe comes with growing nationalism in world politics and international trade, leading to a lesser consensus about the future of the Eurozone or at least on any reform there.
We expect economies will remain rocky and some monetary policies varied. Nevertheless, when everyone looks one way it pays to go the other and currently for us that is the UK.
In the equity space, we continue to favour more defensive, income-orientated stocks and have retained our exposure in under-valued large caps that have an international focus but are cheap because of negative sentiment surrounding Brexit. Recognising when sentiment and fundamentals diverge is important and the situation in the UK has resulted in high quality companies trading on very attractive multiples, with supportive dividend yields of around 5%.
Despite Brexit and an increasingly frail high street, our UK commercial property investments also continued to provide diversification and stability across our portfolios, with steady capital values and attractive income returns. The LF Canlife UK Property ACS was up for 2018 on a total return basis and continues to fare well in spite of negative headlines about UK assets. Our global fixed income strategies also have performed well, benefiting from unhedged foreign exchange positions.
The value of investments may fall as well as rise and investors may not get back the amount invested.
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CLI01345 Expiry 31 March 2019