Fund Selector: Risk assets have room to run

Fund Selector: Risk assets have room to run

When we sat down at the beginning of the year to discuss the prospects for financial assets, politics was unsurprisingly highlighted as a potential banana skin for the markets.

This was particularly the case for European assets, with the region facing the possibility of disruptive elections in Holland, France, and Germany. Meanwhile, investors also faced the issue of Brexit and its implications once the UK decided to trigger Article 50.

European equities were understandably jittery prior to the Dutch election, although they moved higher on what was seen as a market-friendly result.

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Since then, Macron has defeated Le Pen in the French presidential election and so two significant barriers for investors have been removed. Meanwhile, it now also seems likely that Angela Merkel will be re-elected later this summer, which again should be positively received by the markets.

However, the performance of risk assets in the medium to long term has far more to do with economic growth and corporate profitability than politics, and on these measures, continental Europe certainly appears to be turning a corner.

Indeed, the Eurozone economy grew faster than the US in the first quarter and recent economic data suggests that GDP has continued to increase while the unemployment rate is at last down in single figures.

This uptick in activity is also having a positive impact on corporate profits and while this increase is hardly spectacular, it is the direction of travel that is important for investors and share prices have rallied accordingly.

Brexit aside, at Premier Asset Management we expected the political situation in the UK to be reasonably stable this year. Luckily for us and our investors, we do not base our investment decisions on trying to predict these sorts of things. 

There is no doubt the Conservative party has scored a political own goal following its decision to call a snap general election, but as I write the day after polling, markets appear unperturbed.

In fact, it has so far been a very good year for UK equities with investors seemingly relaxed about both the change in the political landscape and the recent slowdown in economic activity.

Although stockmarkets have been hitting new highs in the US, North American equities are underperforming this year when measured in sterling.

US equities remain expensive, although there is no doubt that there has been a pick-up in corporate profits recently and particularly in the tech sector, which is far better represented in the US than any other developed market.

As always, it is much easier to talk about the past than to predict the future.

That said, I continue to believe that while the best of the returns are behind us, risk assets can continue to produce reasonable returns from here.

Investor sentiment has picked up recently, but is nowhere near euphoric.

Meanwhile, a normalisation of monetary policy or anything close to it would be bad news for most assets, although – with the exception of the US – this still appears to be a very long way off indeed.