Andrew Milligan, Head of Global Strategy at Standard Life Investments, talks you through the markets in the month that was July.
The UK is currently experiencing low wage growth and surging consumer debt. In this month’s market review I consider the impact of these factors on the economy and take a closer look at European economic recovery and the strength of the Euro vs. other currencies across the globe.
Wage growth continues to be subdued
In the UK, wage growth continues to be subdued despite the lowest unemployment rate since 1975. Low wages are not just a UK issue though; it’s a global phenomenon, caused by a complex mix of issues, including:
- higher than usual unemployment in many parts of Europe
- excess production capacity in countries such as China
- increasing pricing transparency as more households and companies globally use the internet
- changes in the structure of labour markets with many more self-employed and part time workers
That being said, the underlying issue facing most countries is that, by historical standards, growth in worker productivity is really quite low. Unless that picks up on a sustained basis, wages will always face an uphill struggle – and not only in the UK, but on a global scale.
Consumer debt is on the rise – but how worrying is this?
One of the stories which caught my eye this month was in relation to consumer debt, which has been making headlines recently due to the Bank of England ordering UK banks to hold more capital.
The good news is that the Bank doesn’t see consumer credit or the UK banking system as being at great risk. It’s working to avoid future crises through early action called macro-prudential regulation. Rather than using interest rates, it utilises other regulatory tools to steer the economy and prevent too much debt building up in the wrong place at the wrong time.
The Bank of England’s latest Financial Stability Report may not be breakfast time reading for everyone, but it does offer a breadth and depth of analysis on the UK and global economies and financial systems so is worth a read if you’re interested in the details.
The euro continues to be strong
We’ve seen the pound at an eight-month low against the euro, and we simply have to accept that, since the Brexit vote, there’s been a political element in valuing the pound. This is due to the complexity of the discussions about what the UK’s relationship will be with its largest trading partners. However, there are other reasons behind the strength of the euro, not just against the pound but the other major currencies too.
Many global investors have decided to move much more of their capital into European assets, after comparing the European economic outlook and political backdrop with those of countries like the US and UK. This, combined with the European Central Bank’s potential plans for tightening monetary policy, creates a recipe for Euro strength against all the major currencies, including the pound.
The outlook on Europe
Following on from discussing the strength of the Euro, I also wanted to focus on European economic recovery. The momentum is currently good here, which explains why, at Standard Life Investments, our funds have been overweight in European equities and real estate. Over the second half of the year we expect to see continued strong growth, though not quite as marked as we’re currently seeing.
As ever, there are headwinds and tailwinds. We’re seeing a virtuous circle from lower unemployment, better consumer spending and a pick-up in loan demand. On the other hand, the steady rise in the value of the euro is complicating life for exporters. A jump in bond yields has raised borrowing costs for businesses and governments, and leading indicators (used to gain some sense of which way the economy is heading) are slowly edging down, albeit from a high level.
All in all though, European economies look set for the best growth since before the financial crisis. However, as that’s largely priced into markets already, investors will need to see some solid profits growth if equities are to make a lot of headway.
If you have any questions about your investment strategy, your Financial Planner will be happy to help.
The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your investment can go up or down, and may be worth less than you paid in. Information is based on our understanding in July 2017.
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