I heard a rather interesting analogy recently likening the UK’s economic recovery since the global financial crisis to a burning bonfire. The fire was lit in 2009 after the financial crisis and burned strongly, fuelling growth, for the first five years, before losing some of its ferocity as the economic recovery began to wane into 2014.
As we near the end of 2016, the fire has dampened and is little more than glowing embers. This is not to say the UK’s economic recovery will be extinguished imminently, but the growth that we have experienced since 2009 is undoubtedly becoming subdued.
With this backdrop in mind, we believe that there are three major investment themes to contemplate. Firstly, the search for income will continue. Commentators suggest that UK inflation could be set to rise to 3 per cent as we import higher prices, though bond yields are unlikely to appreciate at the same rate due to continued quantitative easing.
This means investors are unlikely to make meaningful returns on developed market bonds for many years as yields of between 0 per cent and 1 per cent will become the norm.
Secondly, political risk will become more prevalent in the developed world. The concerns over the timing and the implementation of a hard Brexit, combined with the aftermath of the shock US election result and the handover to President-elect Trump in the New Year, should be enough to keep developed market politics busy for the next six months.
However, this is only part of the picture as several key European elections are also due. Any unexpected surprises here could see the future of the euro called into question.
The final theme is Emerging Markets (EM), which have come back into focus, having underperformed their developed market counterparts over the last two years. Historically, the performance of EM has been linked to global commodities. As we are now seeing stabilisation of commodity prices, including oil, and the potential for the dollar to weaken, it is possible the signs of recovery in EM will gather pace as developed economies continue to slow.
How is Myddleton Croft positioned to benefit from the above themes? In terms of equity exposure, we are focussing on UK companies with overseas earnings, coupled with some niche plays, for example biotech, which looks somewhat undervalued at present. We also see value in European and Japanese equities. For our non-equity coverage, which traditionally would have included bonds, we invest in alternative assets which are not correlated to the markets, such as absolute return strategies and gold. A diverse portfolio has the potential to make some real returns during the final simmering stages of the UK’s economic recovery.
• The value of investments and income from them may go down as well as up and investors may not get back the amounts originally invested. Investors should refer to their financial adviser to ensure that our service is suitable for their investment needs.