After stellar earnings growth in many regions, there are now a number of potential headwinds that threaten to overshadow the solid momentum built since the beginning of 2017. Our key concern is the removal of central bank liquidity – all assets have benefited from QE and the effects of its reversal are not easy to predict. In addition to this, trade wars, political risk and a higher oil price potentially precipitating higher inflation all have the potential to rain on the market’s parade. Our leading indicator is not forecasting the end of the global cycle imminently, but it is pointing to growth levels significantly below trend in the coming months.
The outlook is finely balanced and we will be watching markets and incoming data closely over the summer – the dangers of complacency were highlighted by the whip-crack repricing of risk in European periphery markets following Italy’s political upheaval in May. We expect an elevated level of noise based on sentiment swings and news flow, although the attraction of prudent long-term security selection will be unaffected.
With the thin volumes usually seen over the summer potentially exacerbating any volatility, we see value in taking some risk off the table for the time being. Of course, no one can predict the weather with absolute certainty, but at present we prefer the risk of carrying an umbrella on a sunny day to getting soaked in your best outfit when it rains and you were not prepared. Sunny spells with thundery showers.
