We remain cautiously optimistic against this backdrop. While growth rates are nothing spectacular, they are more in line with their historic norms. This return to form should bolster consumer and business confidence, in turn reflected in corporate profits. Since the peak of the financial crisis companies have been cutting costs and expanding their margins; such actions should ensure that profit growth continues over the short to medium term.
As far as our optimism in concerned, it is centred on the UK and the emerging markets. We expect emerging markets to be the major beneficiary of improved economic data in the West; they boast relatively low levels of debt, export-orientated economies and strong growth rates in comparison to their more developed peers, even if growth is currently subdued on a historic basis. Meanwhile, although the UK equity market has underperformed Europe, Japan and the US so far this year, it is easy to forget that it is an internationally diverse market containing companies that derive a large percentage of their earnings from overseas. Despite relatively muted economic growth at home, the UK should benefit from the pick-up in activity elsewhere in the West. Sterling strength is a further bonus at present.
Uncertainties persist
Of course, the post-financial crisis world wouldn’t be the same without its fair share of uncertainties. Two such ‘unknowns’ currently stand out; firstly, talk of the US Federal Reserve (Fed) tapering its asset-purchasing programme and the decision over Ben Bernanke’s replacement as Fed chairman, and secondly, the German elections in September. The first, we believe, is little more than ‘hot air’; any tapering of the Fed’s quantitative easing programme has already been priced in by markets, while the chances of President Barack Obama allowing anything but a safe pair of hands at the helm of the Fed seems very unlikely.
The German elections, however, are more of a concern given the country’s key role in leading its European counterparts over the past few years of eurozone struggles. An inconclusive outcome resulting in political uncertainty could prompt further struggles for Greece and some of the other ‘peripheral’ eurozone economies. This is certainly something to be wary of.
