A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
Philip Hammond delivered the first official Autumn budget for 20 years on Wednesday, and has revised the UK’s growth forecast from 2% to 1.5% in 2017, laying most of the blame on the economy’s flat productivity. GDP for 2018, 2019, 2020 and 2021 is now forecasted to grow by 1.4%, 1.3%, 1.5% and 1.6% respectively. Despite the predicted reduction in economic growth, Hammond announced that he expects unemployment to fall from the current 1.4 million, down to just 800,000 by 2022. He also expects CPI inflation, which is beginning to peak at 3%, to return towards the 2% target later this year. Hammond also announced increases in the tax-free personal allowance threshold to £11850 and the higher rate tax threshold to £46,350 in April 2018, in line with inflation. A further £3bn is also to be committed towards Brexit negotiations.
A fall in industrial production in Q3 was not enough to bring down overall GDP growth within the Eurozone, which increased by 0.6% quarter-on-quarter. These figures only consolidate beliefs of a stronger, more stable EU, although investors will be keeping a firm eye on the current political situation in Germany. Merkel is still struggling to form a coalition government after her narrow election victory, and a new election may be the next step.
US inflation increased by 0.1% month-on-month in October, confirming expectations. This verifies the current overall health of the US economy, meaning the Federal Reserve is likely to hike interest rates in December as planned.
Gary’s market comments in conjunction with our investment partners
One of the ways LGT ‘insured’ against Brexit was to sell all property exposure in the UK, and instead invest into infrastructure to increase liquidity. This was a highly successful move that benefited from the fall in Sterling, and was further boosted by Trump’s election. This year, they have decided to shift focus towards Europe by investing into the Lazard Global Listed Infrastructure. The fund has approx. 60% in Europe and its performance advanced from Macron’s election and from overall economic prospects for the region. LGT now hold circa 4% of infrastructure across their portfolios.
On Monday of this week, 7IM reduced its European equity holding to fund an increase in UK equity. They have favoured European equity for the majority of the year, however, they have decided now is the right time to sell down that position. In the event of a broad market correction, the FTSE 100 should outperform European equity, due to the large, global and defensive nature of the companies in the index. Also, with Brexit negotiations entering a critical time, UK equity should provide a boost if Sterling falls. Additionally, 7IM trimmed their position on gold by 1% across all portfolios due to the threat of rising bond yields next year.
Sources: LGT Vestra and 7IM