The global economy is extending its broad-based recovery, with stronger data coming through from Europe and emerging markets to set alongside established US recovery. Corporate earnings prospects are reasonable, but could see subtle negative effects from more populist policies in some countries. Inflation and debt levels remain the greatest economic threats in our view.
The FTSE 100 and S&P 500 both reached record highs during the month of May. Whilst this has had a short term positive effects on portfolios we do remain cautious with regard to equity market valuations. Markets are being driven more by “animal spirits” rather than by compelling fundamental data. Following the inconclusive UK election, the FTSE 100 has returned to just over 7,300 and the pound has fallen 2% against the Dollar and 1% against the Euro. The FTSE 100 started the year at 7,142 and finished May at 7,204.
Within the FTSE World Index tobacco and technology stocks have increased by 16% in the last month. Consumer stocks and healthcare, have gained 10%, and 8% respectively. Mining and banks are just positive, whilst oil and gas are down by 11%, in line with falling oil prices.
Many of our equity income fund choices are orientated towards healthcare and consumer stocks and have limited exposure to resources and banks. Despite all the noise regarding “rotation” and the need to move into more cyclical areas towards the end of 2016 we remained with managers who ignored this, and this has been beneficial.