Market Commentary: Quarter 2 2017 August 2017

Market Commentary: Quarter 2 2017

In the UK, Prime Minister Theresa May called a snap general election in June, in the hope of increasing her Commons majority and strengthening her mandate for Brexit negotiations. However, the Conservative party lost its majority, with Labour making significant gains.

The UK’s GDP growth disappointed in the first quarter, mainly because of the drastic weakening of the pound and a sharp pickup in inflation, which has squeezed disposable income. At the most recent Bank of England meeting, three of the eight members of the Monetary Policy Committee voted for a rate hike, marking the biggest split in the committee since 2011. Current market expectations suggest a rate hike in late 2018.

In the US, first quarter GDP growth was mediocre, dragged down by poor trade data. Despite this, the Federal Reserve hiked interest rates by 25bps in June, bringing the policy rate to a range of 1.00 to 1.25%.

The euro area saw robust economic growth in the first quarter. Inflation, however, continues to be stubbornly low, with core and headline inflation growth below the European Central Bank (ECB) inflation target of 2%. This highlights the ongoing dilemma the ECB faces between an improving economy and persistently low inflation. Political risk in Europe has been partially mitigated, with mainstream, pro-EU parties maintaining majorities across member countries.

The Japanese economy performed well in the second quarter. However, Japanese inflation growth remains subdued, well below the Bank of Japan’s 2% target, with little chance of policy tightening in the foreseeable future.

The Chinese economy remains resilient despite fears of a hard landing. First quarter GDP growth was 6.9% year on year, beating expectations of weaker growth.

What should investors do in response to these developments?

Many investors change their portfolios in a bid to take advantage of the latest news. However, it’s very difficult to time these changes effectively.

In practice, shifting your portfolio in response to short-term events may lead to little more than increased trading costs.

We believe that investors will usually be better served by identifying the appropriate asset allocation to suit their goals, then sticking with it and tuning out short-term noise.

Market commentary provided by Vanguard – Quarter 2 2017

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Independent Financial Advisors