"Global tensions are heightened as the US announced impending tariffs on all imports from China beginning in September, sparking fears that the slowdown in growth might continue. In turn, business confidence among manufacturers continued to wane. On the other hand, consumer confidence and spending remain supportive – US households have reduced leverage, unemployment is low or falling across the globe and confidence among services businesses has ticked higher recently. We expect the global economy to slow but not to tumble into recession; this equilibrium could last for years. Indeed, a tick back into expansion next year cannot be ruled out. Perhaps most importantly, slowing growth with no recession on the horizon provides a favourable backdrop for risky assets.
“Moreover, hopes have risen for near-term policy easing. In the US, the Federal Reserve (Fed) has halted the shrinking of its asset portfolio ahead of schedule and a second rate cut is widely expected this month. The European Central Bank (ECB) is also expected to cut its deposit rate in September, by at least 10 basis points, and other measures designed to support bank lending – longer-term refinancing and “tiering” of deposit rates – are likely to be introduced. The Bank of England may well cut rates too, in November, with growth slowing due to Brexit uncertainty. Globally, monetary policy remains very supportive. Easier monetary policy may soon be supplemented by fiscal easing, in China and perhaps in Germany; and consumers remain well anchored for now, with rising real wages across most major markets.
“Expected returns for equities over any reasonable length of time still far outweigh those from government bonds, which are offering historically low, often negative yields. However, equities can be volatile – thus we continue to have significant allocations to government bonds despite record low yields. We also hold a meaningful allocation of gold in most strategies, which is facing a reduced opportunity cost headwind in a low-yield environment.
“Brexit remains a wildcard for investors given a wide set of potential outcomes for Sterling. We do not claim to know the eventual outcome, but it is almost certain British currency markets will continue to be highly volatile as the October 31 deadline approaches. We remain comfortable with our mix of Sterling and non-Sterling exposures.”
Full Monthly House View as of September 2019 available to view here