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Investment Clock: Beware summer shocks for equities

by Trevor Greetham in London

Tue 23 May 2017

Investment Clock: Beware summer shocks for equity markets Enlarge Chart loading Image

The Investment Clock model that guides Royal London's asset allocation is in the 'overheat' phase of the business cycle after the strongest surge in global growth and inflation since the 2008 financial crisis. However, business survey readings are falling from recent highs and inflation looks to be peaking outside of the UK as commodity price increases will have stalled. A move away from 'overheat' is welcome news for bonds.

Stock markets often move sideways over the summer and volatility tends to rise. This year may prove no exception, and investors should exploit a seasonal dip. Negative surprises could come from doubts about the ability of President Donald Trump to implement planned stimulus measures or signs of weaker economic activity generally. The upswing in stocks started amid the China devaluation shock of early 2016, so markets will be particularly sensitive to signs that tightening measures in Beijing are starting to take effect.

Nine years after the financial crisis, there is little sign of the surge in wage inflation that provokes central banks into removing monetary stimulus. The US unemployment rate is moving below the so-called natural rate of unemployment at which one would expect to see a rapid rise in wages, and yet wage growth is running around half the level of 2007. This may be due to increased job insecurity, discouraged workers leaving the labour force, or technological change. As long as it lasts, policy-makers are unlikely to support rapid interest rate rises, which is bullish for global equity markets.

Investors should expect continued above-trend growth in developed economies. It would be unsurprising if markets became concerned about slower growth in the coming months, but growth is likely to remain strong in developed economies.

Trevor Greetham is head of multi asset, Royal London Asset Management.