Cazenove's Emily Petersen sheds light on the economic outlook after Brexit for the UK's charitable investors.
Economic data in the UK has shown a broad-based slump in the aftermath of the EU referendum vote.
The early indicators suggest momentum has slowed markedly across manufacturing, services and construction, and there is upside inflation pressure as a result of the weak currency. We expect inflation to continue to rise, with UK CPI forecast to breach 2 per cent in the second half of 2017.
In response and in an effort to avoid recession, the Bank of England delivered a bigger-than-expected stimulus package, reducing interest rates from 0.5 per cent to 0.25 per cent and increasing the amount of quantitative easing.
While the Bank of England faces a trade-off between inflation and stabilising activity, its stance is to tolerate a temporary period of above-target inflation.
The Federal Reserve has also turned more cautious after the Brexit vote, delaying the upward trajectory of US interest rates. Futures markets are no longer looking for a rate increase in 2016, with the earliest move expected in March 2017.
Inflation on the rise
Inflation in the UK picked up more than expected in July, with CPI rising to +0.6 per cent year-on-year, the highest since November 2014. RPI inflation increased to +1.9 per cent year on year. The pickup was mainly driven by motor fuel, alcoholic beverages and accommodation services, and a smaller fall in food prices than a year ago.
The delay in normalisation of interest rates in the US and accommodative monetary policy in the UK have supported equity and bond markets. Sterling weakness has had a meaningful translational effect on the UK equity market, benefitting the large global companies in particular.
With over 70 per cent of the UK equity market earnings generated overseas, a 10 per cent fall in sterling equates to a 7 per cent rise in market earnings, and has driven prices upwards.
We continue to believe that the bond market is overvalued, and underestimates inflationary pressures.
Emily Petersen is a portfolio manager at Cazenove Charities. Civil Society would like to thank Cazenove for their support with this article.
