The battle between heightened political uncertainty and favourable economic and corporate fundamentals is likely to continue, but provided no significant political shock materialises then the positive growth environment is set to continue. Whilst some countries are undoubtedly approaching the mid to latter stages of their extended period of economic expansion, there are very few signs that a slowdown is likely in the near future.

Whilst President Trump has struggled so far to get his pro-growth policies enacted, the US economic outlook remains relatively healthy even without the possible benefit of stimulus measures. Europe continues to show encouraging signs of economic recovery and political risks have diminished following a run of market friendly election results, although Italy and Spain remain in focus.

China continues to successfully navigate retaining a healthy level of economic growth whilst transitioning towards a more balanced economy, although there remain longer term concerns over growing debt levels. We are now seeing broader economic growth across emerging markets as previous laggards such as Brazil and Russia have returned to growth. The rebound in corporate earnings and valuations that are still often cheaper than developed markets have encouraged investors to return to emerging markets and the recent period of outperformance still has the potential to continue.

The UK election result has added to the domestic political instability created by Brexit and the UK economy is showing some signs of deterioration, with growth having moved from being the strongest in the G7 group of large countries to now being the weakest. The rise in inflation, caused by the post-Brexit fall in sterling, has outpaced the growth in wages, squeezing the purchasing power of UK households. Whilst Brexit negotiations have begun, businesses and investors are still awaiting clarity on the likely outcome and the uncertainty is damaging sentiment.

Modest growth is now forecast for the UK economy and alongside higher inflation and political uncertainty does not provide an ideal backdrop for investors. However, UK companies derive most of their revenues and profits from outside the UK so are benefiting from the low level of sterling and the improving global economy.

Now that deflation risks have subsided and global growth is on a firmer footing, central banks are looking to gradually withdraw the exceptional level of monetary policy support they have provided since the financial crisis. Interest rates are now set to gradually move away from their extremely low levels in many countries and central bank balance sheet expansion through quantitative easing will be reined in.

Central bank support has undoubtedly helped the global economic recovery and also boosted asset prices and the reversal of this support will need to be managed carefully to avoid destabilising markets.

Low interest rates and quantitative easing have been particularly supportive for bond markets and helped push yields down to very low levels. Whilst there are structural reasons why interest rates and bond yields should remain relatively low by historic standards, the normalisation of monetary policy could put pressure on bond returns given their sparsity of income. The additional income support for corporate bonds compared to government bonds alongside current very modest default risk still gives us a relative preference for that area within the fixed income world.

10 Year Gilt yield over last 10 years

Source: Bloomberg

The strong recovery in equity prices since the financial crisis has left valuations on above average levels on most measures, but this is supported by the recent improvement in profit and dividend growth that looks set to continue. We are still in the unusual environment of equity dividend yields being well above government bond yields and with minimal returns on cash deposits there are still relative valuation attractions for equities to compensate for their additional volatility.

Commercial property investor sentiment has improved somewhat after the initial post EU referendum dip. Returns are expected to be primarily driven by rental income, with limited prospects for further capital growth. Valuations look full against long term property averages although yields continue to look relatively attractive compared to many other asset classes.

The gradual normalisation of monetary policy around the world is expected to include an increase in the UK interest rate from the current 0.25% before year end, but rates will remain very low by historic standards and higher inflation has left cash deposits struggling to offer anywhere near real returns for savers.

In summary, the current global economic and corporate profit outlook remains favourable, however the extended period of healthy market returns has left most asset classes relatively highly valued. We are preparing for a potential period of more modest returns and volatility increasing from the current subdued level and are holding above average cash levels in our mixed asset portfolios as we look for better investment opportunities.

With concerns over bond valuations, equities and commercial property still offer the best medium to long term prospects for returns ahead of cash and inflation and our portfolios remain tilted towards those assets where possible.

As always, investors must be prepared for some periods of volatility by ensuring their overall investment portfolio is well diversified.