22 June 2017

Objectivity is key

May was another month of low volatility and generally positive returns for equity investors continuing what has been the consistent trend so far in 2017.

Global economic growth has enjoyed improving momentum since summer 2016, driven by China, and this has provided the foundation for higher company earnings and investor optimism. The majority of current data readings remain supportive of this now consensus optimistic outlook, as typified by the Federal Reserve in the minutes of their May discount rate meeting:

'Overall, Federal Reserve Bank directors judged that the economy seemed to be continuing to expand at a solid pace. Directors generally noted steady or improved economic activity across various sectors, as well as greater optimism among households and businesses about the prospects for continued growth.'

We see no immediate reason to fear an end to the better growth of recent months but there are undoubtedly some cracks appearing in this narrative that cannot be ignored. Starting with China, recent PMI readings have undershot expectations and key commodity prices have moved lower -iron ore demand is closely correlated to the Chinese property market and this commodity has fallen by a quarter in six months. Meanwhile, the rating agency Moody's downgraded their rating on China in May, citing expectations that 'China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows'. The Chinese economy is fundamental to the current economic upturn and any such indicators of slowing momentum must be monitored diligently. While equity markets remain optimistic, it does seem that bond investors have become steadily more cautious as 2017 has developed. This can be seen in the gradual flattening of global sovereign yield curves year to date -typically a reflection of declining growth and inflation expectations.

Closer to home, any comment on UK politics is likely to be outdated in moments, but what can be said is that the hung Parliament adds another unwelcome cloud of uncertainty for our economy and inbound foreign investment will surely be increasingly hesitant. The UK economy has proven remarkably resilient since the Brexit referendum last year and original predictions of impending collapse never materialised. The UK economy and consumer confidence will be tested again and for the foreseeable future it is difficult to see conditions improving. In the meantime, we will do our best to be impartial in our judgement of economic indicators and to avoid being swept away in the tide of excited media.

Fred Mahon is the fund manager of JM Finn’s Coleman Street Investments service. Click here for more information.

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