A message from Michelle McGrade, our chief investment officer.
The Queens Speech laid out the government’s expectations and promises for the next five years. Certainly David Cameron and his team are optimistic and confident; boldly stating that taxes and VAT will not rise over the next five years.
So too are most equity fund managers. They’re optimistic about growth in the UK and they’re excited about their investments’ growth prospects. The CBI’s monthly growth indicator published recently showed that growth in Britain has reached its strongest rate for 12 months. Business in professional services is growing the fastest, but retail and manufacturing are also strong. Find out more about our Growth Focussed funds.
The markets though are treading water, evidenced by the FTSE 100 which is oscillating around the 7000 mark. There are some uncertainties ahead: imminently there is the Greek situation, where every week we wonder if they can pay their bills and stay in the Euro. Then there is the budget on 8 July, and the impact of the European referendum is high on people’s minds.
I am more optimistic about the referendum’s outcome than most because when you get away from the noise and political posturing you will hear a general agreement within the union that reform is needed not only for the UK but for all members. Everyone agrees that more flexibility and less bureaucracy is required. As I’ve said before Europe needs the UK just as much if not more than they need us, for example, they export 60% more to us than we do to them.
If growth is strong and inflation picks up from current low levels then the next focus will be interest rates and the bond market will come into focus. And, a rumble in the bond markets may cause a rumble in the equity markets too? It’s becoming clearer that interest rates could rise soon. Janet Yellen, head of the US Federal Reserve said this on 22 May:
“If conditions develop as my colleagues and I expect, then the FOMC’s objectives of maximum employment and price stability would best be achieved by proceeding cautiously, which I expect would mean that it will be several years before the federal funds rate would be back to its normal, longer-run level.”
This statement indicates that the Federal Reserve is expecting to raise interest rates soon. If they do it wouldn’t be surprising if the UK followed soon after. Therefore we are watching the bond market carefully.
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