Wouter Sturkenboom, senior investment strategist at the group, warned the engine behind the UK’s strong economic growth in recent years now faced a series of headwinds.
Inflation rising to over 2% since the start of 2016 has put real wage growth under pressure, acting as an indirect tax increase. He said this. coupled with a employment growth weighing on the consumer, has prompted Russell to take a cautious stance on UK equities.
Sturkenboom said: “The combination of a stable workforce and lower investments is weighing on productivity.
“Inevitably, companies will bring their workforce in line with investment. As they do, the unemployment rate will go up.
“Although both of the drags on the UK consumer are gradual in nature, to ignore them on that basis would be a mistake.”
With the pound remaining the biggest driver behind UK equity market performance, Sturkenboom added that fixed income investors should take a balanced view as inflation rises and growth slows, not letting “either side dominate their stance”.
Elsewhere, he said the European Central Bank would continue to be a driver of reflation, with the gap between fundamentals and soft markets likely to close as investors realise the eurozone was on a solid footing – both economically and politically.
“Of course, we will continue to monitor the political risks, but we remain optimistic that there will not be any surprises in the eurozone next year along the lines of the Brexit vote outcome or US President Trump’s victory.
