Trade disputes are raising the downside risks to our forecast for slightly subtrend growth. We retain our mild underweight to stocks and prefer to take risk in carry assets like credit. Reflecting valuations, we downgrade duration to neutral.
The new prime minister is likely to meet similar challenges given the nation – and as a result parliament - remains divided over what it wants from Brexit. But investors must understand the impact “no-deal” would have on sterling, stocks and gilts versus “change of government”.
Persistently low government bond yields are creating two problems: a lack of income, and limited opportunity to diversify a portfolio as the cycle matures. Alternative assets might help in both regards.
While tariffs remain a concern, the key issue is the degree—which we deem moderate—of U.S. recession risk. The current global backdrop makes the U.S. dollar unlikely to strengthen. Earnings growth expectations are modest, valuations are undemanding, and expected returns are above average.