Volatile markets and a sunny economy

Although we have experienced a little volatility in recent weeks, the overall outlook for the economy looks pretty sunny, more than I can say for the weather outside my window!  But hey, my wife keeps reminding me it’s February what do I expect!  So the overall economic outlook should support equity prices for a while, particularly if investors take their hoards of cash they have on the sidelines and place it in the markets this year, with the recent pullback, there certainly seems to be a buying opportunity.

However, as growth improves central banks (Bank of England, European Central Bank and Federal Reserve (US)) may find it difficult to raise interest rates (required to control growth/inflation) without sparking a recession in a couple of years’ time.

Right now, I feel investors should be more concerned with political risks than macroeconomics and spend less time on monetary policy (inflation, interest rates, growth) and more on political issues such as the next election in the UK and globally or how hospitable will a Corbyn government be to capital.

The increase of political risk is evidenced by the surge in populist parties from 7% in 2010 to 35% in 2016, this is a significant swing in support.  What’s behind this swing?  Inequality – we now have multiple economies running within the country and worldwide, which are vastly unequal.  The elite are prospering and expanding at a rate of knots, whilst the bottom end of the population is still struggling to just get by.

The automation of basic job roles makes the future look even worse; soon Amazon will be delivering your parcels using preprogrammed drones!  It’s already opened a supermarket in Seattle, America with no checkouts!!

We’re moving into an economy where the future career plans for our children, something I often think about for Olly (12) and Bella (11) is building, programming or servicing these AI robots!

With a strong stock market, you need to ensure you are globally diversified and have exposure to the US and technology companies driving growth forward.  The US is c. 51% of world market cap (i.e. The size of the US stock market is 51% of the overall world market value) therefore if you’re investing and have time on your side, make sure you exposure yourself globally to equities.  Take a look at my portfolios on Lexo.co.uk which have a c. 51% exposure to US markets.  Diversify to reduce your risk with short-term high quality fixed interest and enjoy the ride!

 
The Warren Buffett Million Dollar Bet
The stock market and potential interest rate rises: what, why and how am I affected?

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