On the negative side, economic activity in China and the Far East has continued to slow, albeit to more sustainable levels, while taxation issues in the US need resolution ahead of the so called “fiscal cliff” looming at the end of the year, after the Presidential election. In Europe, its seems to me highly likely that Spain will require a formal bail out, and it looks as though the Eurozone as a whole is set to enter recession imminently.
More positively, and perhaps more significantly in the medium term, in the USA a substantial programme of monetary easing has been announced which will continue for as long as is deemed necessary while interest rates look set to stay low for at least another couple of years. In the Eurozone, the creation of a powerful central bank is envisaged, and although it will take time for it to become fully functional, it is in my view a key step towards European problem resolution. As for the UK, it may be that in the third quarter, the UK will have tentatively followed the USA out of recession.
Against the background of these major international issues, I continue to see a place for fixed interest investment in client portfolios as interest rates are likely to remain low for now. Whilst we are seeing a pause in inflation in the UK, I remain concerned about the future trend so the need for protection within portfolios remains. Equity markets however continue to look attractive on valuation terms and companies have been able to continue to strengthen balance sheets while in many areas increasing profitability and increasing dividends. This leads me to the conclusion that even after the Summer rally, equities offer sound medium term value.