Summertime views: the charts we’ve been watching

Inflation, wages and the pound: where next?

The interplay between inflation, wages, interest rates and sterling has been a key focus in the UK this summer. As the chart here shows, the CPI has been edging higher for a couple of years since Britain flirted with deflation in 2015. Inflation is now close to the level at which Mark Carney is obliged to write to the Chancellor explaining why he has let prices rise so far above target. The combination of rising inflation and persistently weak earnings growth means consumers are feeling the squeeze.

Source: Thomson Reuters Datastream, as at 28.9.17

We are a little bit poorer month by month. This creates a dilemma for the Old Lady. Get inflation back under control by raising rates or look through temporary price rises? The recent rise in the value of sterling to around $1.35 shows that the markets think the period of rock bottom UK interest rates is coming to an end.

But the system is self-regulating. Dwindling purchasing power could do the Bank's job for it. Rates will most likely stay lower for longer.

Kim Jong-Un and the search for safe havens

Domestic politics has fallen off European investors’ radars as 2017 has delivered a sequence of reassuring election victories for mainstream candidates. The fears that Brexit and the election of Donald Trump would be the hors d’oeuvres before a main course of right-wing extremism in Europe have proved unfounded. France, Holland and most recently (and least convincingly) Germany have all shown that common sense and pragmatism are still the order of the day in the Eurozone.

Source: Thomson Reuters Datastream, as at 28.9.17

Geo-politics, however, remains unstable, nowhere more so than in Asia where the stand-off between North Korea, the US and its allies in the region shows no sign of abating. It is unsurprising against this backdrop that investors are looking for safe havens. Gold has been on the rise all year but the yellow metal really came back into favour over the summer.

A little bit of bullion is no bad thing in a diversified portfolio. Even better, we think, is a fund like the Select 50’s Investec Global Gold.

Technology: narrowing leadership

One of the classic signs of the top of a bull market is an increasingly narrow focus on a small group of shares. We saw this during the bubble 18 years ago and history has certainly been rhyming more recently as technology has once again led the upward charge. There is always a kernel of truth at the heart of a narrowing market - in this case, tech stocks are indeed a rare source of growth in an otherwise sluggish global economy.

Source: Thomson Reuters Datastream, as at 28.9.17

However, the increasing focus on just one area of the market can disguise broader weakness as sentiment fades more generally. Interesting then to see that, many of the big outperformers in recent years have actually moved sideways in recent months while the market as a whole has continued to hit new highs.

The exuberance which usually marks the final phase of the bull market is notably absent. Perhaps this is another sign that things really are different from previous boom and bust episodes.

Past performance is not a reliable indicator of what might happen in the future. When investing in overseas markets, changes in currency exchange rates may affect the value of an investment. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. For full 5 year performance figures please see Market Data.

I would like to thank the many knowledgeable and experienced people within the wider Fidelity organisation who have helped me develop the ideas in this Investment Outlook. Although the views expressed here do not represent the shared opinion, or house view, of Fidelity's investment team, the combined expertise of over 380 investment professionals in 13 countries is a very significant resource on which I have been able to lean. In particular, I would like to thank Nick Armet, Head of Investment Communications; Paras Anand, Head of European Equities; Richard Lewis, Head of Global Equities; Toby Gibb, Investment Director, European Equities; Jeremy Osborne, Investment Director in Tokyo; Tim Orchard, Head of Asian Equities in Hong Kong; Natalie Briggs, Investment Director, Emerging Market Equities; Matthew Jennings, UK Investment Director; Curtis Evans, Investment Director in our London-based Fixed Income team and Neil Cable, who heads Fidelity'’'s Real Estate investment team.

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