Investment Desk Bulletin

19 July 2017

When uncertainty meets low volatility

IDB 19 07 17

By Roger Jones

In this week’s IDB, we look at the current macro-economic outlook and consider why asset market volatility remains so low in the presence of current background risks.

There is strong growth in the US, buoyed by significant consumer spending - with consumer confidence levels back to pre-financial crisis levels – and a recent upturn in capex. The US labour market is strong but maturing, with nominal wage growth also back to pre-financial crisis levels. Despite a flattening of the yield curve, the risk of a recession in the US is low.

Although lagging behind the US in the business growth cycle, European activity is picking up with a renaissance in consumer confidence and improving credit conditions. The growth outlook for the second half of 2017 is reasonable, similarly lifted by retail sales rising at a robust pace across the Eurozone.

The UK is struggling in comparison to these other economies, with UK GDP the lowest among G7 nations, and a real wage squeeze underway. Ongoing, of course, are Brexit negotiations which are shrouded in political uncertainty.

The key risks to markets are complacency and policy mistake, with it becoming increasingly clear that ultra-loose monetary policy will be slowly reduced.

London & Capital believe that the current growth prognosis is more of the same: low growth and low volatility. Furthermore, we believe the risk of recession is contained but risks remain. On this basis we have recently reduced equity cyclicality and remain focused on income generating assets.