“Stock markets around the world were volatile throughout the first quarter of 2016 amid continued anxiety about the state of the global economy,” the firm said. “Yet we believe investors overreacted to negative news and that the medium- to long-term outlook is positive.”
Following weak economic data at the start of 2016, Rathbones noted there has been concern that the US could fall into recession this year, yet its economy appears to be “robust” with particular strength in consumer spending and the jobs market.
The firm is less positive on Europe. It said that European policymakers have “dithered” in the dealing with the trouble that have followed the 2007 financial crisis. As a result, the region’s banking sector is in ill health and the ECB has resorted to negative interest rates as an extreme measure to boost growth, Rathbones noted.
Across the Channel, the key risk for UK equities is the possibility of British EU exit and potential for further dividend cuts at major companies, Rathbones said. “Markets may become even more volatile as 23 June approaches,” the firm said. “Meanwhile, speculation continues about dividend cuts by some of the UK’s largest dividend-paying companies, particularly in the energy and mining sectors.”
Rathbones also warned of the risk that markets are discounting UK inflation of just 1%, and inflationary pressures could begin to reassert themselves.
“In light of this, Rathbones said index-linked gilts appear “good value” and offer protection against inflation rises. High yield bond valuations look more attractive after the recent setback, but the sector is dominated by the resources sector, which could suffer further problems, the firm noted.
