Please see article below from Jupiter Asset Management received 29/12/2020:
So the UK and the EU have a deal, at last. As I have long anticipated, the potential damage to both sides from a ‘no deal’ – exacerbated by the ongoing impact of the pandemic and lockdowns – was too great to go down that road, and for all the inevitable bluster, threats and counter-threats along the way since Brexit, we have an eleventh hour agreement. Skinny, lightweight, the bare minimum required – one can anticipate the headlines – but a deal nevertheless. This has to be good news for investors in UK equities and, after a very trying year, perhaps the best Christmas present many could have hoped for.
That said, it was probably a consensus expectation among domestic investors that a deal would be reached, so reactions may be relatively muted compared to the reaction had one not been formed. That scenario would probably have seen significant further weakness in Sterling, sharp falls in domestically focused companies and resilience from multinational companies benefiting from the currency’s fall.
As it stands, there is a high likelihood the pound will appreciate, but in all probability only modestly. Relief, the avoidance of a bad outcome and the ability to look beyond this all-consuming negotiating deadline would then buoy sterling assets. Companies reliant on domestic economic activity – retailers, housebuilders, selected leisure and financial companies – should be the most direct beneficiaries. Whilst gains in multinationals will probably be more muted, given the currency headwinds, it is likely they will rise, in the hope that global investors will once more regard the UK stock market as ‘investable’ rather than a pariah of uncertainty.
But the recent sea change in sentiment towards ‘value’ stocks relative to ‘growth’ stocks, spurred by positive vaccine news, has seen some notable gains in many of these domestically oriented businesses already, which must to some extent limit the potential for further progress on ‘deal relief’.
Moreover, for the international observer, the UK economy has suffered a greater hit to economic activity than other European countries, more reliant as it is on consumption, services and leisure over manufacturing. The costs to the Exchequer of support during the pandemic have exacerbated the country’s ‘twin deficit’ problem, necessarily capping any rise in the pound. Political leadership in the UK during the coronavirus has not exactly outshone peers, to put it gently.
Global investors may well bide their time to see how the UK does indeed fare in its newly negotiated relationship with the EU before plunging back into UK equities. Any January scenes of lorry queues at British ports (of which we have of course already had a foretaste), reports of obstacles to the smooth passage of goods or an inability of supermarkets to source avocados – heaven forbid! – will only encourage such investors to stay their hand before rushing to take their underweight exposure to UK stocks back towards a neutral (or even overweight) position.
Non-UK companies looking to acquire UK assets may be rather quicker off the mark, however. Merger and acquisition activity has been picking up, and an end to ‘no deal’ uncertainty may well spur more international companies or private equity firms to press ahead with plans to acquire UK assets in a currency still cheap on ‘purchasing power parity’ yardsticks.
So, a deal is undoubtedly good news for investors in the UK. But reactions are likely to be modest rather than dramatic. I expect overseas flows into UK stocks are likely to build slowly over time. All too soon the focus will return to navigating this difficult virus-impacted winter, to partial lockdowns, rising unemployment and frustratingly slow progress towards mass vaccination and scalable testing. The UK finding its way out of the pandemic and its way in the world outside the EU will quickly fill the news pages emptied of stories about the trade negotiations.
Please continue to utilise these blog posts and articles to help keep your own view of the markets up to date. Articles like this are good to get an understanding of the ‘hot topics’ currently driving markets.
Please see below for the Daily Investment Bulletin from Brooks McDonald, received by us today 17/12/2020:
What has happened
The Federal Reserve had their final rate setting meeting of the year and were eager to reassure markets that quantitative easing would remain until the economy had improved substantially. Whilst markets initially wavered over the lack of further measures they eventually settled largely unchanged.
Last Fed meeting of 2020
The Federal Reserve has been responsible for a large number of the blockbuster stimulus headlines over 2020 but those hoping for another round of accommodation were disappointed. The committee stressed that it would continue with the current pace of quantitative easing until ‘substantial further progress’ had been achieved towards their inflation and employment targets. There was some change to the 2023 interest rate expectations with one member showing a hike that year and also to the 2023 inflation level expectations where 4 members pointed to a small overshoot of the 2% target. Of course, a small overshoot would not pose a problem for the bank given it has unveiled average inflation rate targeting earlier in the year which will give them additional room if needed.
Update on unfinished business
The tone around Brexit talks improved again yesterday with sterling seeing further strength but remaining in the 1.09-1.11 band versus the Euro that it has been maintaining despite the high jinks of recent weeks. EC President von der Leyen said yesterday that ‘there is a path to an agreement now’ but reports suggest that fisheries remain a stumbling block. Rumours are circulating that Parliament is readying to return early next week to vote on a deal which is also supporting the UK currency. Meanwhile US Fiscal Stimulus talks continue amidst a positive tone, but the spectre of Christmas is nearing so there is a narrowing path to pass through Congress. The more contentious $160bn bill appears to have been predictably side-lined but the more substantial package seems to have the support of both sides.
What does Brooks Macdonald think
Economic data over the last few days has seen beats in Europe (specifically the compositive PMIs) and misses from the US on retail sales. This highlights how difficult it is for economists to calculate activity during periods where restrictions are gradually tightening, and consumer behaviour is shifting. The miss in US retail sales does provide further impetus for fiscal stimulus however and markets shrugging this off reflects hope that this may provide a catalyst for support rather than be a sign of things to come.
Regular daily updates like these are a useful method of frequently updating your holistic view of the markets, especially given the way the market is rapidly changing by the day with Coronavirus and Brexit.
Please continue to utilise these blogs to help inform your own views of the markets.
Please see below for economic and market news from Brooks McDonald’s in-house research team posted 05/10/2020:
In Summary
Donald Trump’s hospitalisation rattled markets last week but reports that he is recovering buoy sentiment
US Stimulus talks remain ongoing but the two sides are still far apart, raising the risk of further delay
Barnier’s talk with EU countries over the UK fisheries policies suggests possible compromise ahead
Donald Trump’s hospitalisation rattled markets last week but reports that he is recovering buoy sentiment
After a weaker Friday, the expectation that Donald Trump may be released from hospital as soon as today has helped markets start the week in positive territory. US politics is certainly the key topic at the moment with investors trying to weigh up the probability of a Biden ‘clean sweep’ but also whether any US stimulus will come prior to the election.
US Stimulus talks remain ongoing, but the two sides are still far apart, raising the risk of further delay
Last week saw a volatile Presidential debate and the hospitalisation of Donald Trump due to COVID-19. It is still too early to say whether the latter has had any impact on polling. The two polls which took place during Friday and Saturday (when the news had broken) suggest Joe Biden’s lead remains intact but further information will be needed. Previously, investors were favouring a Trump re-election given the continuity and more market friendly policies. As the risk of a contested election rises and stimulus is delayed, the preference of markets appears to be shifting towards a comprehensive Joe Biden win. The logic is that a clear win is difficult to legally challenge by Donald Trump but also that it will allow significant fiscal policy to be unveiled. The less market-friendly policies are unlikely to be tabled whilst the US is focusing on the economic recovery and this buys time. Over the weekend, Donald Trump tweeted in support of stimulus, asking lawmakers to ‘work together and get it done’ however the gap between the Democrats and White House still appears to be significant.
Barnier’s talk with EU countries over the UK fisheries policies suggests possible compromise ahead
We have learned not to hold our breath on Brexit trade talks but despite the recent bluster there are signs that both sides are getting closer to a deal. While little concrete information came out of the call between Johnson and von der Leyen on Saturday, both sides stated their commitment to finding an agreement. The Financial Times suggested yesterday that EU negotiator Michel Barnier was set to have talks with EU countries impacted by the fisheries policy. This would suggest movement on one of the main sticking points alongside the role of state aid. US politics is likely to dominate the week ahead with European COVID-19 cases rising steadily in the background. Paris is shutting all bars from Tuesday amid a continued increase in cases. In the UK, hopes that cases had slowed last week were quashed as 16,000 cases were found to be unreported between 25 September and 2 October. This week we will also see the releases of the services and manufacturing Purchasing Managers Indexes across the world, with most countries reporting today and the UK tomorrow.
Although current global events may cause market researchers and analysts to concentrate heavily on certain areas of the market (in this case the US Election and it’s effect on the US Economy), it is important that we keep our views as holistic as possible and consider the whole market. Events such as the US election can have a knock-on effect on a wide variety of market sectors, and it is important to understand the reasoning behind these effects.
Please keep reading our blogs in regular intervals to keep your view of the markets well informed, holistic and up to date.
Please see below the latest market insight from Karen Ward at JP Morgan, with particular reference to the ongoing complexities of Brexit.
An American colleague joined me on a call recently and was perplexed by the fact that I was talking about Brexit. “Isn’t Brexit done?”, he asked me. Alas, no. While the UK did officially leave the EU on 31 January, for the economy nothing actually changed since the UK entered into an 11-month period of transition. During this period, the UK and EU were supposed to agree on a future trade arrangement to commence on 1 January 2021. The clock is well and truly ticking.
Negotiations are proceeding slowly and significant differences still remain. At the root of the problem is the same issue that has plagued the discussion for the last four years. The UK wants to regain control – to become fully sovereign – setting its own rules and regulations overseen by British courts. However, the EU is not willing to grant significant access to the single market without guarantees that standards will not be undercut to gain competitive advantage.
So what happens next? Either the next six months will see a breakthrough and a free trade agreement (FTA) will be established or the UK will leave and trade on World Trade Organisation (WTO) terms.
Trading on WTO terms has been used synonymously with ‘hard Brexit’. What exactly does that mean? The short answer is potential tariffs, more customs paperwork for businesses that trade with the EU and potentially the need for the UK to be removed from EU supply chains if regulatory conformity cannot be guaranteed. It is these nontariff barriers that we would expect to have the most economic impact. There could also be significant ramifications for financial firms since the UK would lose its passporting rights – its ability to serve EU clients from the UK. Advocates for a hard Brexit argue that a clean break would allow the UK more flexibility in negotiating future trade deals with other trading partners, although any benefit from these agreements would still only be seen once these trade deals had been implemented, which is often a lengthy process.
What will happen and what will be the implications for markets? In our view, the announcement of a comprehensive FTA might see sterling rise to 1.45 against the US dollar. By contrast, in a no-trade deal scenario we see sterling closer to 1.10 against the dollar. Much weaker sterling would partially help the UK to cope with new trade frictions.
Our central expectation is that despite ongoing near-term sabre-rattling, by year end pragmatism will prevail and a relatively narrow trade deal will be agreed. When ‘Brexit’ was added to the English dictionary, the word ‘fudgery’ should also have been included.
We expect a significant amount of ‘fudgery’ in order to get a partial trade agreement done. This may, in fact, involve highlevel agreements that disguise what is essentially a transition to iron out the finer details. Such a narrow trade deal will likely still be disruptive to economic activity in the EU and the UK over the long term. But we expect various arrangements to ease the near-term burden of the change for both sides. We expect that both sides will want to minimise the day 1 disruptions given the extent to which both economies are still struggling to overcome the Covid-19 recession. Therefore, changes may well be phased in over time, spreading the economic cost over a number of quarters if not years. The UK could thus claim the sovereignty to set their own rules and standards without initially making substantial disruptive changes.
While this outcome is our central expectation, there are significant risks around it that investors should be mindful of. Sterling may be particularly volatile and, with almost 80% of revenues coming from abroad for the FTSE 100, this will also have implications for the stock market, since higher sterling could put downward pressure on earnings and vice versa should sterling fall, all other things being equal. However, we caution against relying too heavily on the FTSE rallying in the event of a hard Brexit as a disorderly Brexit would be likely to impact both UK and EU activity negatively, depressing some of the overseas earnings that matter to UK companies.
We will continue to provide the most up to date information on the markets and economy. Please check in with us again soon.
Please see below up-to-date commentary from Brewin Dolphin, received late yesterday. The article provides insight into mixed market performance with Covid-19 and Brexit developments noted as current contributing factors.
Equity markets were mixed last week as markets struggled to gain traction amid a flow of (mostly) worrying news. There was the worsening second wave of Covid-19 in Europe and the announcement of tighter restrictions on socialising in the UK. Then, a potential hitch with the AstraZeneca vaccine, added to increasing worries of a no-deal Brexit. On the financial front, perhaps the most remarkable development was the 3.5% fall in sterling which likely helped the FTSE100 outperform its international peers over the past week.
Last week’s markets performance*
• FTSE100: 4%
• S&P500: -2.5%
• Dow: -1.66%
• Nasdaq: -4%
• Dax: +2.8%
• Hang Seng: -0.77%
• Shanghai Composite: -2.83%
• Nikkei: +0.86%
*Data for the week to close of business, Friday 11 September.
A mixed start to the week
Equity markets in the UK and Europe turned in a mixed performance on Monday despite encouraging news about the resumption of the AstraZeneca/Oxford University vaccine trials in the UK.
The FTSE100 closed 0.1% down on Monday and the more domestically focused FTSE250 rose by 0.7%. Sterling rose 0.76% against the dollar to $1.289, and by 0.42% against the euro to €1.085.
In Europe, the pan-European Stoxx600 gained 0.15%, the German Dax fell by 0.07% while France’s CAC-40 closed up by 0.35%.
In the US, however, the positive vaccine news from the UK helped boost sentiment, as the Dow closed up by 1.2%, the S&P500 rose by 1.27% and the Nasdaq rebounded by 1.87% to 11,056.65.
Analysts said hopes about an early vaccine were tempered by concerns about rising Covid-19 cases in the UK and Europe leading to tighter suppression measures, with a consequent dampening of economic activity.
In early trading on Tuesday morning, UK shares were heading up.
Brexit is back
The developments over the last week have suggested an increased risk of a no-deal departure. And just as in previous bouts of Brexit-related stress, the worse things go, the greater the pressure is on the pound. The fortunate thing from an investment perspective is that this tends to be supportive of UK bonds (which perform inversely to the UK economy), and also UK equities, because of their inverse sensitivity to the level of the pound. In other words, when the pound falls, all other things being equal, most UK equities rise.
This might seem counterintuitive, but the reality is that the sensitivity of even UK equities to the UK economy is generally low and mostly limited to a small number of sectors, such as retail, real estate, home construction and banks. More broadly, the overall market tends to be more exposed to the overseas currencies in which its revenues are denominated. For example, around 75% of the earnings for companies in the FTSE100 come from overseas and so are denominated in foreign currencies. Therefore, when the pound falls, these earnings are worth more in sterling terms and this helps UK equities.
Overseas equities, unsurprisingly, are even more inversely sensitive to the level of the pound as they are both denominated in foreign currency and economically linked to revenues received in other currencies.
Below we show the % change in trade weighted currency, the top graph shows 2015 to present and the bottom chart shows the period from 15 May 2020 to present.
What this means
All of which means that, ultimately, we don’t see Brexit as a material investment risk. Paradoxically, the greater issue for us is how to protect wealth when Brexit risks subside because, under those circumstances, we would expect to see the pound rise and bonds (and possibly equities) fall – again, all other things being equal.
So how do we see Brexit developing? It seems likely that the current standoff is another episode of the brinksmanship that has been exhibited throughout the last four years. The intention of the government is to pressure the EU into making some concessions on fishing and, most notably, state aid. Most outstanding issues between the EU and the UK seem reconcilable, but the state aid point is one the UK government seems to want to push. Why? It seems like the government wants to ensure it can do everything it can to support strategically sensitive industries such as technology and renewables. This idea of a “Made in UK” strategy to match the “Made in China 2025” strategy is what the European’s are afraid of. It seems likely that, when push comes to shove, the UK will be forced to find a way of discreetly backing down – but we can’t be sure.
Covid-19 developments
This also comes with an adverse trend in relative Covid-19 performance as well. America’s renewed surge in cases which began in the Midwest has failed to gather pace while some large states are seeing further improvement. Progress is not universal, however, and as we can see from Europe, a true second wave is likely in the US at some point. But for now, the US case growth numbers are improving which is helpful for Donald Trump as we approach the election in November.
Case growth in the UK, on the other hand, has accelerated. This prompted the government to impose new restrictions that came into effect from Monday to great consternation from the back benches. Evidence continues to point to Covid-19 as a continuing threat with the low rate of hospitalisations during France’s second wave now beginning to pick up. The concern here is that young people are spreading the virus amongst themselves and then introducing it to older generations of their families.
Covid-19 and your investments
Regarding the investment risks of a second wave of Covid-19, we believe that investors already expect successive waves until such time as there is a widely available vaccine. The question from an investor’s perspective therefore is not so much whether further waves come, but what the impact is on perceived valuations.
Understanding how the market reacts to that is not trivial. However, we should distinguish between what we saw in the early part of 2020 which was a shock, from what we might see in future periods, which will be more of an evolution of a known risk.
When we had the shock in March it was largely because the structure of the policy environment and the market were both set up for late-stage economic expansion. That is quite typical for the entry into a recession and is the reason that equity markets react so poorly to the onset of recessions.
On a valuation basis, the loss of a year or two’s worth of earnings is bad news but would not justify the falls seen earlier in the year – hence markets were able to rebound substantially.
With Covid-19 much more of a known-unknown, and with market expectations of ebbing and flowing regional measures to try and slow those waves, we acknowledge that Covid-19 remains an important factor for the market, but it should form part of the ‘wall of worry’ that markets often find themselves climbing.
Wall of worry
The cliché about climbing the ‘wall of worry’ describes the way in which markets are often resilient in the face of known risks. It assumes investors gradually become resigned to the fact that these issues will be resolved in due course and reflects the way in which the overly cautious gradually get sucked into the improving narrative. It is helped by such circumstances also tending to coincide with periods when monetary policy is very supportive.
One more handhold on that wall came from the news that the testing of AstraZeneca’s vaccine has been paused. Although one of the front runners, this was not the only candidate. However, over the weekend it emerged that the trial would resume in the UK and India, but it remains paused in the US.
Also providing a great deal of angst is the planned end to the furlough scheme next month. Chancellor Rishi Sunak is under a great deal of pressure from lobbyists and trade unions to extend the scheme further to prevent a “tsunami” of job losses this autumn.
An extension would not be without international precedent. Germany has announced an extension to its Kurzarbeit scheme, which gives financial aid to employers while allowing them to reduce employees’ hours. It had been scheduled to finish in March 2021 but has been extended for another year. France has also extended its version of the furlough scheme but has tweaked the rules so that employers must reduce hours for workers rather than keep them off work altogether. If the British government is going to follow suit, it is leaving it late.
We strive to update our blog content regularly in order to provide the most relevant and accurate data so please check in again with us soon.
