Global equity markets, led by Wall Street, have on the whole been positive this year as a consequence of continuing low interest rates which benefit companies in a number of ways, most obviously by reducing their borrowing costs, putting a favourable spin on their investment decisions. Companies have also been able to use cheap money to finance equity buybacks, pushing up prices.
On the other side of the equation, ongoing “trade wars” between the US and a number of its trading partners, in particular but not exclusively China (Europe, very much including the UK, is also involved), have created uncertainty. Restrictions on global trade clearly hamper growth, making it harder for companies to win new business and this has to an extent been reflected in the mixed third quarter company results season on both sides of the Atlantic. The ebbs and flows of the trade negotiations are currently sending out mixed signals: it is quite possible that sensible compromise will be found, at least in some areas, and we remain reasonably positive on global equities.
We have two observations regarding the UK investment outlook. The first of these is that both main parties are promising substantial increases in public expenditure over the next few years and the previous Chancellor’s “Brexit war chest” has already been heavily overspent or overcommitted. Short of substantial UK economic growth in the short term, which we regard as unlikely, government expenditure as a percentage of GDP looks set to rise to levels last seen in the 1970s: It is hard to see how this can be financed without significantly higher borrowing and/or taxation. In the meanwhile, the Brexit debate continues to add deep uncertainty. Whatever form any initial Brexit outcome may take, the UK is still nearer to the beginning than it is to the end of working through its long term international trading relationships, on which so much of our prosperity depends. Arguably, not a good environment in which to be overweight.