Investors are undoubtedly facing a period of heightened political and economic uncertainty – both in the UK and abroad.
Brexit continues to dominate the landscape in the UK, as Britain looks set to trigger Article 50 in the coming months and set in motion its exit from the EU. Sentiment surrounding Brexit seemingly changes on a daily basis, as politicians prepare for a parliamentary debate on many aspects of the EU exit – such as leaving the Single Market.
While there are uncertainties in the UK, it is also unclear who Britain will face at the other side of the table during these negotiations – with key elections in the Netherlands, France and Germany this year. With the rise of populist candidates across Europe, together with the recent experience with the Brexit and US presidential votes, the outcome is far from certain.
Elsewhere, investors also have to try and determine – if possible – the longer-term impact of Donald Trump assuming the presidency of the world’s largest economy, the United States. President Trump is expected to be more expansionary in terms of fiscal policy, while he is also expected to cut business and personal taxes. This is likely to improve growth in the US, which proved positive for global equity markets in the latter part of 2016. Conversely, stronger fiscal policy would worsen the US deficit and lead to an increase in inflation. There are also many elements to a Trump presidency investors cannot predict, such as the potential impact of a rogue tweet on financial markets or international relations.
As for inflation, prices are clearly on the way up in the UK, with inflation rising to 1.6% in December, the highest since July 2014. The inflation threat should not be ignored, particularly with the likely implementation of more inflationary policies likely as we move through the year. Inflation undermines real incomes for consumers, which would likely be detrimental to consumer spending. A glimpse of government bond markets over recent months shows the extent of rising inflation expectations in the UK and other developed countries.
So what does all this mean for investors in the UK? There are many advisers who have been increasingly looking to de-risk portfolios in recent months following the strong run for risk assets and the expectations of continued market volatility.
The current uncertainty also reminds us of the need for and the benefits of diversification. While we expect markets to continue to be volatile this year, diversification across sectors and asset classes can provide a cushion in times of stress.
The value of investments may fall as well as rise and investors may not get back the amount invested.
This information is for professional advisers only. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and are subject to change at any time without notice. The contents of this article are not intended as investment advice.
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CLI00641 Expiry on 31/01/2018