- The coming quarters are likely to be one of slow and slowing Tariffs have muddied the water as consumers and companies dragged forward demand to earlier this year to mitigate some of the tariff impact. There is a risk that this gives an illusion of a more solid economic backdrop in comparison to what we are likely to step into during the second half of the year. This slow and sluggish economic growth will bring with it rising stresses in the jobs market, which in turn, triggers a more cautious consumer and lower spending.
- In the UK & Europe, increased defence spending is the order of the day. Whilst the UK is more constrained with its budget, Germany has much more capacity for higher government investment. In China, consumer spending and confidence remain incredibly low, but there are signs of a stabilising property market. Loosening monetary policy hints at signs of credit growth, but tariff conflicts with the US are a headwind for its exports.
- With tariff impacts emerging in the US, this helps keep consumer prices higher than would have otherwise been the case and weakening growth is unlikely to spur the Federal Reserve into rate cutting action until the very end of this year. In the UK, the steady as she goes, once a quarter rate cut is likely to continue, whilst the ECB, no longer concerned with the inflation picture is probably closer to the end of its own rate-cutting policy than peers.
- Fixed income yields remain attractive, and increasingly the level of yield available looks like the primary driver of returns. Delivering steady income and defensive ballast to the inevitable buffeting equity markets is fixed incomes primary role. There’s both a danger that central banks don’t cut interest rates as fast as we had hoped, but also the possibility that economies slow faster than expected and central banks have to bring rates down quicker than planned.
- Meanwhile, equity markets are divided. Certain sectors feature highly successful, cash-generating businesses with expensive valuations, while others offer clear value but still lack a catalyst to unlock it. Over the long-term, it makes sense to hold a measure of both, hence our policy of having well diversified portfolios and not trying to time mean-reversion in markets.
- In currency markets, year to date, there has been notable weakness in the US dollar, although there were some signs of this stabilising in more recent weeks. Whilst the chief beneficiary of US dollar weakness has been the euro, the Japanese yen and sterling have enjoyed a period of relative strength too.
- Gold continues to shine bright, briefly hitting record highs of $3500/oz. Rising uncertainty, a weakening dollar and interest rates falling are helpful backdrops which are drawing investors to the metal, but so too is the level of demand from central banks bolstering the amounts of gold in their reserves as a diversifier to US Treasuries. The outlook remains solid.
- Brent Crude prices were looking weak as production was set to be increased by OPEC+ members (and quotas were already being broken). In addition, the weakening economic outlook was weighing on demand expectations and there is a US administration keen to bring down energy costs too. Hostilities between Israel and Iran and the potential threat that levied against oil supplies and transportation, saw a spike in the price of Brent before falling back to $67/barrel by quarter end.
