Investors today are paying a relatively high price for domestically focused UK companies compared with their multinational peers, which seems counter-intuitive given Brexit uncertainty. For investors, this divergence is creating both opportunities and challenges, which are the focus of our lead article “Digging below the surface of UK indices".
With all the major regions of the global economy growing in synch, investors are shrugging off political uncertainty. Equities have been buoyant, particularly in the US technology sector, where rising valuations are the focus of our lead article “Great tech-spectations”.
Indicators point to a peak in the pace of global expansion, but we still prefer equities to bonds.
The world is experiencing a period of rising inflation. A rebound in oil prices has helped after dragging down UK consumer price inflation into negative territory briefly in the second half of 2015. Improving wage rates in China, which in the past had been an exporter of global disinflation, have also contributed.
Early last year, investors were preoccupied with fears about the pace of China's economic slowdown and the threat of deflation. Just 12 months later, and almost 10 years since the start of the financial crisis, a global economic upturn appears to be under way across the US, Europe, Asia and most large developing countries.
Stock markets continue to take an optimistic view of the risks to future earnings, but we remain gently cautious and note that there are plenty of reasons not to be complacent.
While financial markets in the developed world responded positively to the election of Donald Trump, the reaction in emerging markets (EMs) was mostly negative.
One of the most overlooked risks for financial markets over the next decade is the potential for the US to impose tariffs on imports. This risk is greatest if Donald Trump wins on 8 November. Yet our analysis suggests conditions are ripe for protectionism to have broader popular appeal: less extreme politicians than Mr Trump could use it to secure votes.
Few would dispute that a grounding in economics is a vital weapon in any professional investor’s arsenal, but evidence increasingly suggests an understanding of psychology could be just as or even more important. Recent financial events reveal repeated patterns of irrationality, inconsistency and incompetence in human decision-making.