But the majority appears to be staying with a gradual tightening path, and in any event all members have agreed that another element of progressive tightening — a windback of the Fed’s ‘quantitative easing’ bond buying programme — will get under way “relatively soon”, possibly as soon as the Fed’s next meeting, on September 19-20. The futures market (going by the FedWatch indicator compiled from interest-rate futures prices at the Chicago Mercantile Exchange) has taken note of the Fed’s recent internal debates, and now rates the chances of a 0.25% increase at the Fed’s final meeting of the year on December 13-14 at roughly 50:50, rather than odds on as seemed likely earlier this year. Even if the timing and scale of increases are being wound back a bit, however, the ultimate direction of travel still seems clear: an economy now at only 4.3% unemployment looks unlikely to need the fed funds kept as low as 1.0%-1.25%, its current target range.

The ECB is currently being rather coy about exactly when it will move and what it will do — “Don’t set dates. We need to think. We need to have lots of information we don’t have today. There is a lot of uncertainty around”, said ECB President Draghi after the latest (July) monetary policy meeting — but the general expectation is that it will start with an announcement that the ECB will be winding back its bond-buying programme, with any eventual interest rate hikes later in the piece.

The outlook for bond markets is consequently challenging. As the North Korean issue has shown, they still have portfolio insurance value, and pessimists about geopolitics will want to maintain their exposure. But the fundamentals are running against the asset class. The eventual rise in bond yields may not be as large as investors once dreaded — the latest (August) poll of U.S. forecasters run by the Wall Street Journal, for example, sees the U.S. 10-year yield rising by 0.3% by the end of this year and by a further 0.4% during the course of 2018 — but it looks to be on its way.

International Equities — Outlook

The economic outlook continues to support equity performance, with good news out of the U.S., the eurozone, and Japan. The American economy continues to perform well. The key market indicator is the monthly employment release, and recent data have been positive, with 209,000 new jobs in July (more than forecasters had expected) and a further fall in the unemployment rate to only 4.3%. Other data have also been supportive, notably the latest (July) retail sales numbers, which were much stronger than expected and which showed that the firming labour market is leading to higher-spending households.

The good economic news is flowing through to corporate profits. According to U.S. data company FactSet, the companies in the S&P 500 had a 10.1% year-on-year increase in earnings per share in the June quarter (7.8% excluding the distorting impact of a massive improvement in profitability in the energy sector). The outlook for ongoing profit growth looks good: Share analysts expect that earnings per share for 2017 as a whole will have grown by 9.5%, and they expect an end-year level of 2697 for the S&P 500, which would be a 9.4% gain from its current level. Profits per share are also expected to rise further in 2018, by 11.1%.

Good news in the U.S. carries more weight than in other markets — U.S. share valuations are particularly high, and good profit outcomes are essential to meet investors’ high expectations — but it has also been buttressed by better than-expected outcomes elsewhere. The previously struggling eurozone is showing every sign of a decent improvement in economic activity: The first (‘flash’) estimate of year-on-year growth for the June quarter was 2.2%, higher than forecasters had anticipated and faster than the March quarter’s 1.9%. And Japan, which has had an on-again off-again pattern of growth, has finally managed to string six successive quarters of economic growth for the first time in over a decade, with gross domestic product growth running at a 4% annualised rate in the June quarter, ahead of the 2.5% expected.

While the economic outlook remains favourable, the global equity market nonetheless faces a major challenge: underappreciated levels of risk. The International Monetary Fund, in its latest (July) update to its flagship World Economic Outlook Report, agreed that the outlook is supportive — “Economic activity in both advanced economies and emerging and developing economies is forecast to accelerate in 2017, to 2 percent and 4.6 percent respectively”. But it also pointed to a variety of risks which may not be a big issue in the very near future but could be problematic later on, or as the IMF put it, “Short-term risks are broadly balanced, but medium-term risks are still skewed to the downside”. In particular, the IMF said that “Protracted policy uncertainty or other shocks could trigger a correction in rich market valuations, especially for equities, and an increase in volatility from current very low levels”.

Fund managers feel the same way. In the latest (early August) Bank of America Merrill Lynch poll of global fund managers, a record 46% of them said that equity markets are overvalued (they are particularly avoiding the U.S. and the U.K, preferring the eurozone, emerging markets, and Japan). And they see a number of risks, headed by policy mistakes at one of the major central banks, a bond market crash if bond yields were to move smartly from their currently unusually low levels, and the geopolitical threat of North Korea.

The IMF’s comment about unusually low volatility also suggests that investors may be underestimating the true scale of risk. The VIX Index, which measures how much share price volatility investors expect to encounter from holding the S&P 500, continues to track at very low levels. On a scale where a reading of 80 is extreme (depths of the global financial crisis) and 40 is worrying (Greece/Eurozone financial crises), the VIX only hit 16 at the height of alarm about North Korea, and has since dropped back to 11.7, which is effectively an “all clear on the horizon” reading (the index rarely trades lower than 10).

On the plus side, this could be read as showing that share prices will continue to be resilient no matter what surprises emerge from Pyongyang or elsewhere. More realistically, it likely reflects a short-sightedness about potential upsets. While Investors have some basis, on the macroeconomic outlook, for an ‘all going well’ approach to world shares, the outlook is likely to be bumpier than current complacency allows for.

Performance periods unless otherwise stated generally refer to periods ended August 15, 2017

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