Time to calm down after EU dramas

FINALLY, we can pause for breath at the close of a hectic six months of political events kicked off by the UK’s EU referendum.

The Austrian election saw the far-right candidate, Norbert Hofer, defeated by the (Green) independent, Alexander van der Bellen, though Hofer still had almost 47 per cent of the vote.

In Italy there was a resounding “No!” to Prime Minister Matteo Renzi’s reform package, quickly followed by his resignation, yet markets have taken this in their stride.

Perhaps we might even look forward to the next few months with a touch more optimism.

There has been much discussion this year about the limits of monetary stimulus and the role that fiscal policy will in future play in boosting growth.

The first big test will come in the US where President-elect Donald Trump has pledged to loosen the purse strings with tax cuts and infrastructure spending. Markets have reacted by selling government bonds and switching into more cyclical equities and “value” styles.

And these trends are likely to continue albeit there will be questions as to whether Trump’s plans are achievable, because they assume a large and rapid increase in the US government’s debt burden. Either investors (through selling off US Treasuries) or congressional deficit hawks could scupper them.

Higher growth and inflation would suggest higher interest rates. Bond markets have already taken the lead, with the US 10-year yield on the rise.

A Fed raise next week is fully priced in, but there are some concerns about what happens after that.

Our view is that they will be inclined to let the economy “run hot” for a while, with the risk of prematurely cutting off the oxygen supply deemed to be greater than allowing some overshoot of the inflation target.

Taking all this into account we see a slightly more attractive medium term outlook for balanced portfolios, but with the returns skewed towards equities and credit. John Wyn-Evans is head of investment strategy at Investec Wealth & Investment