We're cautious, but it's not all bad news out there...
"Even before the Prime Minister called a snap election we were approaching the next six months with caution. Now there are even more unknowns to weigh, particularly in the UK. European GDP growth and inflation have softened recently, but PMIs (forward-looking surveys of business sentiment and orders) have been pushing steadily higher. We worry whether these burgeoning improvements will be crushed if Germany or France chose radical governments in their upcoming elections. The UK election appears to be sewn up for the Conservatives, given the absolute turmoil that the Opposition finds itself in. Still, polls have been wrong before and we have seen several examples of unexpected protest votes recently.
As for the US, we remain confident. This is the engine room of the global economy and lately it has been running lean and mean. There have been a few disappointing data points in April, but there are always poor numbers in volatile flash estimates.
The main issue we have with American stocks is price. Current valuations are a tad too optimistic about government stimulus and the outlook for short-term earnings growth, in our opinion. We expect to see an adjustment, and hold a reasonable amount of cash to buy quickly at keener prices if markets correct themselves. We are, however, watching for cracks in this story.
As it happens, our global equities analyst has recently returned from jubilant Middle America. He found high spirits and confidence in the fundamental economy and the administration (regardless of whether tax cuts arrive). Companies are looking to hire and increase their capital stock in anticipation of greater demand — particularly at home in the US. The housing market is only just beginning to hit its stride following the credit crunch, so there’s plenty of room for expansion.
We’re cautious, but it’s not all bad news out there."
This market comentary was written by the multi-asset team at Rathbones, headed by David Coombs. Rathbone's have kindly given FMB permission to publish this article.