While inching towards its first interest rate rise amid dramatic shifts in the value of the pound, the UK is also ‘shrouded by one of the most uncertain general election outcomes in living memory,’ Flanders warned as the firm launched a ‘Q2 2015 Guide to the Markets.’
While this is a ‘recipe for market volatility’ in the short term, Flanders said for most investors the pace of growth in Europe and the timing of the first US rate rise are going to be much more important.
“As we highlighted at the start of this year, a period of dollar strength could be helpful for the global economy if it slows the pace of rate rises in the US, while supporting faster growth in Europe and Japan,” said Flanders. “But a further race to the bottom on currencies would be counterproductive for markets and global growth, as well as posing deeper problems for the Federal Reserve.”
Flanders also noted that while European companies’ share price gains look good when denominated in euro, they look a lot different when converted into the stronger major currencies of the US dollar and UK pound.
“Though sentiment has shifted in the first part of the year, there continues to be a large degree of consensus in markets and the main developed world equity markets are more expensive than they were,” Flanders noted. “On balance, a pro-risk stance still makes sense but investors should be diversifying more – and expecting less.”
