Investment Outlook

read on...

September 09, 2019

Investment Outlook

Tom Elliott

Market sentiment: A touch more confident, following the announcement of further U.S / China trade talks in Washington in early October and some reassuring economic data from the U.S (namely the August non-manufacturing ISM index of business confidence). Oil prices are up a little, while gold has given back some of its August gains. Investors anticipate further rate cuts from the Fed, the ECB, and the Australian RBA over the coming months to counter signs of weakness in global demand growth. 

Investors are conscious that the current U.S economic cycle is the longest on record (ie, since the late nineteenth century) and many are looking for issues that might induce a recession. Some analysts point to falls in U.S second-quarter corporate earnings and capital spending as a potential trigger, others place greater emphasis on the risk to the U.S and the global economy of the U.S/ China trade dispute. The VIX ‘fear index’ stands at 15, down from 20 a fortnight ago. 

Brexit and sterling. We have seen a small rally in sterling in early September, as the risk of a no-deal Brexit has declined as Prime Minister Boris Johnson’s authority has weakened and it appears likely he will be forced to seek an extension to Article 50 beyond 31st October. The currency’s recent volatility, with several days of swings against the dollar of over 1% in late August and early September, looks set to persist: the currency market is forecasting volatility to be higher for sterling than for the Mexican peso over the next two months, for only the third time in the last five years.

While some ultra-bearish analysts suggest the pound could fall to $1.00 on a no-deal Brexit (eg, Nomura), others suggest a floor of around $1.09 (eg, Barclays). But we might also see a strong rally in sterling if the anti-Brexit Conservative rebels and opposition parties continue with their recent successes in confounding Johnson’s Brexit plan. A return to levels around $1.50 may be possible if the U.K eventually abandons Brexit, given the likely surge of investment and pent-up spending that would boost economic growth.

The prime minister appears trapped. His attempt to stop Parliament passing a law preventing a no-deal Brexit, through proroguing Parliament, has failed. So too has his attempt to have a general election this side of 31st October, on the binary choice of ‘support my no-deal Brexit or have Jeremy Corbyn for Prime Minister’.

Meanwhile, his attempts to strike a new deal are regarded by many as a sleight of hand, with no new proposals made to solve the Irish backstop issue that will meet the E.U’s minimum requirements. Indeed, the government’s chief negotiator in Brussels has reportedly demanded a revision not only to the Irish backstop provision that Theresa May agreed to, but is also demanding the right for the U.K to have its own regulatory standards for goods – which would make a future trade deal with the U.S easier to do, but make one with the E.U harder. Some E.U leaders suspect the Johnson government does not really want a deal.

Johnson resignation? Johnson looks set to lead the Conservatives into a general election after 31st October, having failed to achieve Brexit, nothing to show in terms of negotiations with the E.U, and deep hostility towards him from a large part of his party after having removed the party whip from 21 Conservative MPs last week who voted to avoid a no-deal Brexit. The Brexit Party, which Johnson has been accused of trying to imitate, will eat into Conservative votes. Does Johnson have the stomach for such a fight, or will he resign?

Investors can protect themselves from market uncertainty through exposure to a broad range of assets, currencies and geographic regions. The mantra of an investor should always be ‘diversification’ – this is especially pertinent in today’s uncertain market conditions.

A multi-asset portfolio for the long term. Many long term investors favour investing in a combination of global equities and bonds since the two asset classes have a relatively low correlation with each other and so offer diversification benefits. Below is an illustration of a typical 60% equity/ 40% bonds fund. The exact ratio of equities and bonds will reflect a client’s risk profile and investment horizon.

<< International Investment Strategy