The Weekly Strategy Report (19 June 2017)Contributor Multi-Asset Solutions
- The results of the UK’s snap election—a hung Parliament—magnify risks to both the upside and downside. On the upside, the possibility of a “softer” Brexit, with an emphasis on maintaining economic links with the EU, and the potential for better growth, has probably increased. But to the downside, the fragility of the new government also increases the risk of negotiations collapsing and a chaotic Brexit—for investors perhaps the most unsettling prospect.
- Consumption and investment data have deteriorated modestly, and our base case is for further slowing in the pace of UK economic growth.
- Pound sterling remains central to our asset class views. Sterling currently looks cheap on a purchasing power parity basis, but the UK’s twin deficits—in its budget and current account—are an additional drag. For the time being we see GBP/USD in a volatile range, but with a risk of further downside as Brexit negotiations advance. We are cautious on both UK equities and UK bonds as uncertainty and slower growth weigh on earnings, and real yields on UK Gilts are unattractive compared to other major government bond markets.
EXHIBIT 1: UK GILTS LOOK RELATIVELY EXPENSIVE
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