6th October 2016
Wouter Sturkenboom, senior investment strategist, EMEA, Russell Investments, offers an outlook on the UK economy and why it is too early for investors to let their guard down with regards to Brexit, despite the palpable sense of relief from markets of its impact so far.
“As shocking as the Brexit vote was, its impact so far has been less bad than feared. Survey data on consumer and producer confidence as well as the housing sector have partly rebounded after steep initial drops. Financial markets too have recovered quickly.
“We believe, however, that it is too early for investors to let their guard down. Our growth expectation of 1% for 2016 remains unchanged. The risk of a recession in the next 18 months has declined but the growth slowdown is still very much in place.”
Underweight UK equities, with a particular emphasis on domestically exposed stocks
“Price momentum for equities improved over the third quarter but this was offset by overbought short-term contrarian indicators. With so much economic pain left in store and too much uncertainty hanging over the country, we continue to advocate for underweight UK equities positions in UK domestically exposed risk assets.”
Gilt yield expectations should be low, and inflation-linked bonds look favourable
“From a fixed income investor’s perspective, government bonds have continued to perform strongly on the back of BoE stimulus with the 10-year yield falling to a low of 0.52% as of August 12, 2016. This was a bigger drop than we expected and we think it constitutes a bit of an overshoot. Nonetheless, beyond a bounce from overbought levels it continues to be hard to see yields rise much on a sustainable basis. We maintain our range for the 10-year gilt yield at the end of 2016 at 0.8-1.4%.
“Investors should continue to keep their expectations with respect to gilt yields low and we advocate rotating away from nominal bonds into inflation-linked bonds. Inflation expectations have slowly started to pick over the quarter and as a result inflation- linked gilts have outperformed. We think this is likely to continue as the lower British pound filters into the inflation statistics going forward.”
In its Q4 2016 outlook, the Investment Strategists at Russell Investments offer further thoughts on the outlook for other regions around the globe: