4 July 2017

Here comes summer

Markets seem to be taking their summer holidays early this year. With corporate and economic news thin on the ground, there isn’t a great deal to get one’s teeth into.

Volatility is muted, despite current uncertainty and, while shares are off their highs, they have given back surprisingly little. Perhaps the modest improvement in the oil price is helping, though it is hardly racing away. Still, with central bankers featuring strongly at present, you might have thought a little more nervousness would be present.

Of course, there’s no actual new bad news around, but the potential for some sort of upset remains. US shares are considered on many criteria to be over extended, with a Trump business boom the only apparent justifi cation for current ratings. Our own market looks less at risk of a downward revaluation, though that could change if political events undermine the May government. Even then, it is likely it would only be domestically focussed businesses affected.

For investors, the majority opinion seems to be that we will muddle through somehow. Certainly, it is hard to imagine the Conservatives willingly going to the country soon, while the reality is that details of whatever deal Brexit brings is still many months distant. It is worth noting, though, that some companies are insuring themselves against a tough departure from Europe by establishing operations in the EU. Unfortunately, this state of affairs is set to continue for the next two years.

With the end of the month, the quarter and the half year imminent, we can expect much more in the way of corporate and economic news in the weeks ahead. The fact that those central bankers charged with setting interest rates appear to be adopting a more hawkish stance does suggest the underlying economic picture is continuing to improve. Even our own Monetary Policy Committee now has a minority committed to raising rates, even if the Governor and his deputy remain committed to keeping rates low.

Meanwhile, the fund management industry has fallen under the spotlight of the regulator. While the approach adopted has been welcomed in many quarters, the ultimate consequences are hard to gauge at this early stage. Greater transparency on fees appears to be the aim and costs to investors are more likely to fall than to rise. There has already been significant merger and acquisition activity in this sector of the financial services industry and a regulatory shakeup is likely to encourage even more.

So, sitting on one’s hands as an investor continues to look prudent. Clearly vigilance and flexibility remain important, but in a low interest rate environment, shares can provide an important comp onent for most portfolios. We need to be mindful of both potential upsets as well as opportunities, though.  

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