Emma Wall: Hello, and welcome to the Morningstar Series, Market Reaction. I'm Emma Wall and here with me today is Nick Brooks of ETF Securities to discuss the U.K. economy and exactly what it means for investors.
Hello, Nick.
Nick Brooks: Hi.
Wall: So, the U.K. is officially out of depression. What does this mean, if anything at all?
Brooks: Well, I think for most investors, it probably doesn't mean all that much. I think most of the markets have priced in a pickup in the U.K. economy, we've seen that in interest rates. We've seen that in property prices and we've seen that in equities. So, a lot of this is really economist numbers highlighting that we're now back above where we were before the bust, but in real terms and market terms that is all factored in.
Wall: There has been a lot of positive data for us to consume over the last year, Mark Carney, originally said he wouldn't raise interest rates until unemployment was below 7%. Of course, that happened in about a third of the time he predicted, but there hasn't been all good news, we haven't seen the wage inflation that we'd like to indicate that things are really improving. I know that you think the U.K. positive news is not all that sustainable, don't you?
Brooks: Well, I think one of the issues that we're seeing is that the property market plays an important role in the U.K. economy, as it does in most economies and we've seen quite a rise in property prices, particularly in London, but across the U.K. we're seeing increases. I think there are some concerns that we're getting to bubble like territory.
Of course bubbles can go on for years, notoriously, so but I do think it's a concern that it's been very focused in the property sector and I think that is a concern of Carney and the Central Banks for good reason.
So, I think they have this balancing act, where they would like to continue to encourage a broadening and deepening of the economic recovery, in order to allow wages to start to improve and start to see livelihood start to improve, but the flipside is, they don't want another bubble in the property market that will cause another crash. So, they have this balancing act and I suspect initially the focus will continue to be on macroprudential measures, but ultimately interest rates are the main factor that will cause property prices to stabilise.
Wall: All this data is well and good if you're an economist. If you're an investor, what does it mean and where are the opportunities lying if they're not perhaps in the U.K.?
Brooks: Well, I think, this is again, this is a key dilemma that most investors are facing today, because we've seen a lot of good news and there's been a lot of liquidity in the markets over the past few years and that is very much reflected to risky asset. So, equity markets, developed market equities have rallied very, very strongly, in a number of key markets, valuations are looking quite stretched, in a number of the fixed income markets as well.
So, I think investors to the extent that they believe that this cycle can continue and that there will continue to be relatively high liquidity or moving further afield, emerging market equities are starting to see inflows and we start to see better performance out of emerging markets. China equities have started to perform. We're starting to see inflows into China equities and commodities as well. Commodities have lagged developed market equities for three years and they've started to turn. We've seen relatively strong performance across the commodity spectrum recently, and we're starting to see flows going into that sector as well now.
Wall: We had some really positive news from China regarding the growth figure. This obviously is going to be good news for industrial metals. What exactly does it mean for gold?
Brooks: Okay. That's a very good question. So for industrial metals, absolutely, I think every industrial metal will have its own individual fundamentals, but a rise in demand from China in the second half of the year should generally be positive for the broad industrial metals and also platinum or palladium in our view.
Gold's a bit trickier, because gold is often looked at as a safe haven asset or maybe an insurance asset, as a better example. So, gold has done quite well when earlier this year we saw disappointing growth in the U.S. and while we saw some shocks in the emerging markets, we've seen geopolitical events in the Middle East and other areas, gold's done well and more recently as well; but gold doesn't tend to react well when real interest rates are rising and if the scenario is correct that we see continued acceleration of growth in the second half of the year, and of course that could be wrong and that interest rates rise later this year, that's probably not great tactically for gold, but the flipside is, we're seeing very strong physical demand for gold coming out of China as they liberalise and open up and a pickup in Chinese growth and wealth in the second half of this year will likely increase that demand for gold.
So, we have an offsetting factor on the demand side for gold. So, in our view based on a macro scenario, we think that gold will probably be in a relatively narrow trading range in the near term with the medium to longer term outlook depending very much on the developed market debt outlook.
Wall: Nick, thank you very much.
Brooks: My pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
