David Coombs, manager of the Rathbone multi-asset portfolio funds
The latest Budget showed just how hamstrung this government is. Chancellor Philip Hammond presided over an underwhelming affair. It would appear that money was too tight for any meaningful fiscal boost or spark of vision.
The fragility of this government means there is a real threat that it could collapse, opening the way for Jeremy Corbyn’s Labour to take power in an early general election.
The chances of this seem slim, but the potential effects are worrisome enough to keep this risk high up in investors’ minds. A failure over the Brexit negotiations seems the most likely spark for this tinderbox.
If Mr Corbyn were to become prime minister, we believe gilt yields would rise and sterling would fall dramatically as foreign investors may abandon UK assets wholesale.
Domestic equities would be hit hard, both by rising import costs and a fall in businesses’ appetite to invest (hitting economic growth).
The ultimate result could be stagflation. If an election were called, we would avoid UK assets with extreme prejudice.
European inflation appears likely to remain muted. Growth has probably peaked – at 2.5%, relatively low for a region heavily tied to global commerce – and there’re still plenty of unemployed in the bloc.
For us to change our view on the continent, we would need to see: a reacceleration in global growth; a sustained increase in bund yields; better prospects for the financial and consumer discretionary sectors; a global adjustment where value companies outperform growth.'