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Rathbone's 10 charts to guide you through the rest of 2017

10 charts, five themes, one guide to all you need to know to get you through the remainder of 2017

Rathbone's Strategic Asset Allocation Committee beneath Citywire AAA-rated David Coombs have identifed five key trends which they believe will be critical to optimising your portfolio into early next year. Read on for their insights.

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Rathbone's Strategic Asset Allocation Committee beneath Citywire AAA-rated David Coombs have identifed five key trends which they believe will be critical to optimising your portfolio into early next year. Read on for their insights.

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The FTSE 100 benefited from sterling weakness after last year’s EU referendum vote (figure 1). However, Brexit uncertainty and a rebound in sterling on recent speculation of a UK rate hike have caused the large-cap index to underperform.

The FTSE 250 has outperformed the FTSE 100 in terms of share price since 2009, but the earnings of large-cap UK companies have not lagged those of small- and mid-caps nearly as much. As a result, a valuation gap has appeared between the indices.

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Over the long term, the FTSE 250 usually outperforms the FTSE 100 and is closely linked to the value of sterling. We expect large-cap equities to outperform small- and mid-caps in the near term.

Despite an uneven market, we view the mid-cap area as a source of interesting opportunities compared with FTSE 100 companies. This combination suggests active management rather than passive investing may be particularly productive in the UK market.

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Gold is often seen as a hedge against inflation, but our analysis shows what really matters for gold prices is real interest rates – the difference between interest rates and inflation. As real rates fall, gold tends to appreciate and vice versa.

An allocation to gold can provide a hedge against a weak dollar and other currencies in general. It can also be a useful hedge against rising geopolitical tensions, such as the recent sabre-rattling between the US and North Korea.

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Gold serves as the ultimate hard currency and should perform well in highly inflationary environments, when faith in monetary policy is shaken. However, a grim outlook is not necessary to justify a modest allocation to gold in a multi-asset portfolio as an insurance policy against market risks.

We invest in exchange-traded funds that own physical gold bullion in secure vaults on either a hedged (protected against fluctuations between the dollar and sterling) or unhedged basis.

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Investment inflows into European equities have been particularly strong since Emmanuel Macron was elected France’s president. More than €20 billion poured into the asset class from the start of 2017 to late June, compared with €16 billion into US equities.

Short-term leading indicators suggest growth peaked in the second quarter. Our preferred indicator, the Belgium business confidence survey, shows growth is slowing, while monetary dynamics have also become less supportive.

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We remain concerned about the high level of non-performing loans in Europe. Euro strength is also putting downward pressure on inflation and there are signs that strong returns on European equities could be coming to a halt.

Political risk is not as high as some may think, and fund managers see value in the financial and consumer discretionary sectors. However, we are cautious on the outlook for further gains in European equities given growth appears to be peaking.

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A large portion of the UK infrastructure market comprises private finance initiative (PFI) schemes, which fund public infrastructure projects with private capital. The government issues an operating lease to a consortium for 25 to 30 years, which removes the debt from its balance sheet.

Risks for long-term investors include uncertainty about what will happen to the leases when they expire. Also, the cash flows used to value UK PFI vehicles are discounted by interest rates and inflation

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A flood of investment in infrastructure funds has increased competition for a limited number of projects, driving down potential returns. PFI vehicles are cautious about buying assets where the risks do not match the rewards, so are starting to buy shares of infrastructure companies.

The recent performance of infrastructure investment trusts has become positively correlated with the share prices of utility companies in the FTSE 100. It remains to be seen whether this shift will last, but for now we are watching these developments closely.

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UK household debt is back where it was at the time of the 2008 financial crisis, with car finance deals accounting for three quarters of the growth in debt. Savings rates have meanwhile plunged to an all-time low as consumers rely on more debt to maintain spending.

However, Bank of England stress testing of exposure to car loans suggests UK banks would suffer only modest losses to their core capital even if car prices fell more sharply than during the financial crisis.

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In the US, low interest rates, low unemployment and looser lending standards have boosted new car sales. Some commentators have likened the rise in auto loan delinquencies (figure 10) with the run-up to the 2007 subprime housing crisis, but we believe that comparison is too extreme.

Auto loans comprise just 9% of US household debt, while mortgages accounted for around 70% at the peak of the global financial crisis.

Though we do see rising household indebtedness in the US and UK as a growing headwind to growth, we see little risk of another financial crisis.

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