Market View August 2017 – what’s driving markets?

Andrew Milligan

In this month’s market review I reflect on some of the recent news stories which caught my eye: the rise of the state pension age, low wage growth in the UK and globally, and surging consumer debt. I consider what’s next for the pound and take a closer look at the outlook for Europe.

The state pension age is set to rise again

The Government has announced a change to the stage pension age, raising it from 67 to 68. This change affects those born between 1970 and 1978 and takes effect between 2037 and 2039 – giving tomorrow’s pensioners 20 years to prepare.

While we expect future investment returns to be moderate compared with past history, the power of compound interest can still work over such a long time frame.

With all this in mind, the simple response to these changes for those affected would be to save early and save often in a diversified portfolio if possible.

Wage growth continues to be subdued

In the UK, wage growth continues to be subdued despite the lowest unemployment rate since 1975.

This is not just a UK issue though; it’s a global phenomenon, caused by a complex mix of issues. These include:

  • higher than usual unemployment in many parts of Europe
  • excess production capacity in countries such as China
  • increasing pricing transparency as more households and companies globally use the internet
  • changes in the structure of labour markets with many more self-employed and part time workers.

But the underlying issue facing most countries is that the growth in worker productivity is really quite low by historical standards.

Unless that picks up on a sustained basis, wages will always face an uphill struggle, not only in the UK but globally.

Retail businesses are moving online

More and more retail businesses are moving online and we’re seeing a clear impact on commercial real estate – retail property space is becoming less important within commercial property indices or benchmarks than offices, factories, warehouses and logistics facilities.

This is more apparent in countries such as the UK and US than in Europe so far and largely depends on how over-built the retail sector was in each country before online shopping makes such an impact on consumers’ habits.

For example, the number of shopping centres on a per person basis in the US is over 5 times that of the UK, which in turn is close to double that of Germany.

We can already see that parts of the real estate investment trust market in the US are showing noticeable signs of weakness as this balance of supply and demand begins to alter.

The euro continues to be strong

We’ve seen the pound at an eight-month low against the euro, and we simply have to accept that since the Brexit vote there’s been a political element in valuing the pound.

This is due to the complexity of the discussions about what the UK’s relationship will be with its largest trading partners.

However, there are other reasons behind the strength of the euro – not just against the pound but the other major currencies too.

When comparing the economic outlook for Europe versus the US and the UK, or the political backdrop between these countries, then many global investors have decided to move much more of their capital into European assets – these are amongst the most popular globally according to some surveys.

And if you add in the European Central Bank’s potential plans for tightening monetary policy, we have a recipe for euro strength against all the major currencies, including the pound.

Consumer debt is on the rise – but how worrying is this?

Consumer debt has been making the headlines in the UK recently with the Bank of England ordering UK banks to hold more capital. The good news is that the Bank doesn’t see consumer credit or the UK banking system as being at great risk. The Bank’s job is to take early action – called macro-prudential regulation – to avoid future crises.

But rather than using interest rates, it uses other regulatory tools to steer the economy and prevent too much debt building up in the wrong place at the wrong time.

The Bank of England’s latest Financial Stability Report may not be breakfast time reading for everyone but it offers a breadth and depth of analysis on the UK and global economies and financial systems and is well worth a read.

The outlook on Europe

There is a good momentum behind the European economic recovery, explaining why at Standard Life Investments our funds have been overweight in European equities and real estate. Over the second half of the year we expect to see continued strong growth, but not quite as marked as we’re currently seeing.

As ever, there are headwinds and tailwinds. We’re seeing a virtuous circle from lower unemployment, better consumer spending and a pick-up in loan demand.

On the other hand we’re also seeing a steady rise in the value of the euro, which is complicating life for exporters.

A jump in bond yields has raised borrowing costs for businesses and governments, and leading indicators – used to gain some sense of which way the economy is heading – are slowly edging down, albeit from a high level.

All in all though, European economies look set for the best growth since before the financial crisis. However, as that’s largely priced into markets already, investors will need to see some solid profits growth if equities are to make a lot of headway.

If you have any questions about your investments, as always we recommend you speak with your financial adviser.


The information in this blog should not be regarded as financial advice.

Please remember that the value of your investment can go up or down, and may be worth less than you paid in. Information is based on our understanding in August 2017.

The links provided in this blog are for general information purposes only. Standard Life accepts no responsibility for information contained in the sites or for the sites not being available at all times.