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Market Commentary

Investment markets have begun the year in a positive mood, helped by optimism about Mr Trump’s economic stance. His intentions are seen as promoting economic growth in the USA and this may incorporate reductions in the burden of company taxation as well as more direct spending on a range of infrastructure projects. Little in the way of detail on stimulus policy measures has been announced, but a degree of optimism has dominated market sentiment.  Meanwhile, underlying activity in the US economy appears to be reasonable, with unemployment remaining below 5%.

In addition, there has been some relief regarding a toning down of Mr Trump’s previous comments on international relations: He has reiterated US commitment to NATO while supporting the “One China” policy and standing firmly behind Japan regarding friction arising from the recent launch of a missile by North Korea. It is fair to say that while relations with the UK are good, the President is less enthusiastic about the European Union than his predecessor.

Stock markets, following surprise votes last year, are only too aware of political risks on the horizon. The immediate challenge in Europe is to reach agreement on the Greek debt bailout talks, where a deadline was set for 20th February. Thus far, the IMF has warned that it will not commit further funds without evidence of progress in Greece on its austerity plans. Eurozone countries are reluctant to provide further funds ahead of 2017 elections in Holland, France and Germany. Greece needs a measure of debt relief, but this looks unacceptable to several hard line participants in discussions. Populist moves are evident in Europe, but while Marine Le Pen is gaining ground in opinion polls, she is not expected to win the second round of voting. Should she succeed it would provide a significant shock and further damage to the European project.     

Investors are anticipating inflation to rise in many developed western economies during 2017. In the UK, the inflation rate rose from 1.6% in December to 1.8% in January, boosted by higher petrol and diesel prices and a tempering of food price deflation pressures. There are expectations of an increase to above the official Bank of England target of 2% following depreciation of sterling after the Brexit vote and this is likely to restrain consumer spending growth as the year progresses. A general increase in base rates is thought unlikely, but a reversal of the 0.25% reduction in August might well occur.

In the Eurozone, official inflation forecasts are for a rise to 1.7%, with higher fuel costs a significant factor. Again, interest rates are likely to remain ultra-low, although some further tapering of the bond buying programme might be envisaged. In the USA there are some signs of wage pressures building and this will no doubt influence the Federal Reserve’s policy on interest rates. Lately there are hopes of perhaps just one increase during 2017, but this view could well prove to be too optimistic.  Inflationary trends are also apparent in China, where the consumer price index rose from 2.1% in December to 2.5% in January. Here, a slower pace of economic activity later in the year would not be a surprise as the authorities seek to cool down excesses within the property market. 

Given the uncertain political background, and risks in sovereign bond markets if inflation does take hold, the strategy adopted is to achieve well diversified portfolios with a strong focus on sustainable income generation.

21st February 2017       

Disclaimer: The information provided does not constitute investment advice or recommendations. Whilst we have taken all reasonable care to ensure that the information contained within this publication is  accurate, current and complies with relevant UK legislation and regulations as at the date of issue, errors and omissions may occur due to circumstances outside our control. Please note that past performance is not a guide to future performance and that the value of investments, and the income derived from them, may fall as well as well as rise and investors may not get back the full amount originally invested. Everys is authorised and regulated by the Financial Conduct Authority in respect of financial services No 120379.       

   

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