The year to date has seen an improvement in equity markets, Sterling has held broadly steady in foreign exchange markets, interest rates have continued at the low levels of recent years, and fixed interest values have stabilised.
In so far as equities are concerned, we have continued to see companies delivering results that are generally in line with expectations. Generally company balance sheets are continuing to strengthen, and while the pace of advance has slowed, dividends have been generally growing at what appears to be sustainable levels. These trends stretch well beyond the UK into international markets and on a valuation basis, equities remain attractively priced.
Levels of Sterling, interest rates, and fixed interest markets are very interlinked and, after a small downgrade of the UKs economic outlook by some of the international credit rating agencies caused the currency to slip back initially, it has since regained its poise. I believe that interest rates here and around globe look set to continue at current low levels for the foreseeable future, and I do believe that conventional gilts look overvalued unless the new governor of the Bank of England embarks upon further quantitative easing this summer. For the moment, the seemingly relentless increase in commodity prices, including gold, has been reversed, and in the short term this will reduce inflationary pressure. However, I feel that in the longer term above target inflation looks set to be an ongoing feature of the UK economy.
Looking further afield, levels of economic growth remain satisfactory, particularly in China. The latest figures from the USA were acceptable, if not spectacular, while first estimates of the UK’s GDP this year were better than expected but still leave a deal to be desired. Within the Eurozone however conditions remain difficult although this should not necessarily detract from the merits of investment in strong European equity funds for exactly the same reason that one might invest in similar UK or North American focussed funds, i.e. the global reach that many of those companies enjoy.
I continue to advise my clients against remaining overweight in cash, on the basis that to do so in the hope that it is a “safe haven” is flawed as inflation continues to erode purchasing power, while interest rates available do not provide sufficient return to compensate for this. Whilst equity markets in particular can be volatile in the short term, for investors with a longer term view point, cash continues to represent a dangerous option unless there is a particular requirement to maintain deposits in excess of sensible reserve figures.