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Key risks are unchanged

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Robert Farago (pictured), Head of Asset Allocation at Schroders Private Banking, expects the global economy to expand over the balance of this year and into next albeit at a slowing pace…

The key risks are unchanged: events in Europe, a policy error by the US administration, a hard landing in China and an oil price spike caused by events in the Middle East. Even if all these are avoided, that still leaves us facing a prolonged period of below par growth.
 
Slowing economic activity is likely to lead to disappointment in corporate profits relative to expectations. However, the peak in margins has historically occurred more than a year before the peak in equity markets. The environment of low inflation, low interest rates and low wage inflation is a positive backdrop and means that margins should remain high.”
 
Buying bonds with yields at record lows in the US, UK and Germany will ultimately prove to be a poor investment since central banks are clearly willing to take extreme measures to tackle the threat of deflation.”
 
Gold has proved to be a safe haven this year for investors in the UK and euro area. We still see the gold price as too expensive to act as a reliable hedge against inflation. We expect it to remain expensive until governments in the developed world are able to put their budgets onto a more sustainable path.”
 
We expect further modest falls in UK commercial property rents in the second half of the year. We see no scope for price increases for the foreseeable future but commercial property continues to offer a more attractive source of yields than much of the bond market.
 

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