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Legal & General: Our Asset Allocation team’s key beliefs

Please see below for Legal and General’s latest Asset Allocation Team’s Key Beliefs article received by us the afternoon of 25/01/2021:

Bubble trouble?

Never have more people searched for the term ‘stock market bubble’ on Google. Data stretching back to 2004 show that January 2021 is set to eclipse January 2018, when searches for the term both preceded and followed a 10% drop in the S&P 500 over nine trading days. As we have highlighted before, investor optimism is pretty well inflated and, while most sentiment indicators don’t look stretched, many are elevated.

Burst case scenario

Not everyone is optimistic, though. One scholar of market bubbles, Jeremy Grantham, opened his new outlook: “The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble.” Grantham has a good track record in predicting the moments when bubbles burst, so should we be worried? We think the famed investor may be right but, as he concedes, we believe the market could still run a lot further. Our own bubble index shows that the probability of a market bubble has indeed been rising. In fact, it is now the highest it has been since 2008.

What has driven this? We have seen an increase in capital raising through IPOs and SPACs, some of which echo the tech bubble of the late 1990s. US retail investor activity has also taken off, with easier access through investment platforms and, for some, new money to play with from stimulus cheques. However, we are just emerging from the COVID-driven economic recession. This means many macroeconomic indicators have improved, policy is supportive, and there is plenty more cash on the side lines ready to be deployed, regardless of further fiscal stimulus.

So while the market is definitely reminiscent of a bubble forming, it could easily still get much stronger from here. We therefore believe it’s too early to call a bubble now.

The moderates yield

If you weren’t able to watch any of the US presidential inauguration, I recommend viewing US National Youth Poet Laureate Amanda Gorman’s recital of “The Hill We Climb”, a powerful and gritty poem of hope for the future of the US, from a self-proclaimed presidential candidate for 2036.

In the more immediate future, the most relevant aspect of the new Biden administration to financial markets will be the prospect of more fiscal stimulus. The central case is for another virus relief package worth $1 trillion to be passed in the coming months, with an additional $1 trillion recovery package potentially following later. The quicker the economy recovers, of course, the smaller later packages will be.

Politically, though, we see the path of least resistance actually being for more fiscal spending rather than less. With a razor-thin majority, power accrues to the moderates, which means only consensus policies can pass. We expect it will be easier to build such a consensus on extra spending (giving things away) than on extra revenues (taking things away). While Democratic moderates have supported virus relief and the current package so far, several are not on record as supporting Biden’s tax proposals. Finally, voters don’t appear to care as much about deficits anymore, so senators probably won’t either.

Treasury yields could be the place where changing fiscal dynamics are priced, and indeed US yields have risen more than others in recent weeks after the Georgia runoffs, but as it stands we are comfortable with an overall neutral position on duration. In fact, we prefer US markets to UK gilts, which have only seen more modest yield rises despite the so-far successful vaccine rollout and expectations for a fiscally conservative budget.

Flexible recipe for fixed income

Multi-asset portfolios are like giant cakes, baked with multiple ingredients. We have decided to add a new ingredient to our cake: Chinese bonds. Technically it’s not new, as they are a growing part of emerging-market bond allocations in portfolios, but we have moved to an explicitly positive view.

We believe Chinese bonds add a lot of diversification to our fixed income holdings as China hums to a slightly different economic tune from the rest of the world, with a different monetary policy framework too. Historically, Chinese bonds have had a low correlation to other bonds. Their yields are relatively high, and we are particularly interested in bonds that could continue to provide protection in macro downturns as we believe many traditional bond markets will struggle to provide the defence they offered in the past.

This is just one of the steps we have been taking in portfolios to try to manage investor outcomes in a low interest-rate environment, with greater roles for non-traditional fixed income assets as well as defensive currencies and other strategies.

Regularly ‘picking the brains’ of investment managers and experts by reading articles like these can help update your own view of the markets and current global affairs.

Please keep reading these blogs to keep your view of the market well informed and up to date.

Stay safe and well

Paul Green 26/01/2021

Team No Comments

Brooks McDonald Daily Investment Bulletin

Please see below for the Daily Investment Bulletin from Brooks McDonald, received by us today 05/01/2021:

What has happened

Markets started the day positively but the New Year jubilance faded as the US COVID outlook worsened and a tight Georgia run-off today could go either way. The US index started the day in positive territory before falling as much as 2.5% then settling 1.5% down at the close.

COVID’s new variant and restrictions

The new COVID variant has been responsible for a large quantum of the surge in the South East of England and news that it had now been detected in New York, Colorado, California and Florida did little to help the mood. Whilst there is no evidence that the new strain is more deadly it does appear to be transmitting aggressively, causing strain on the healthcare system. It is this strain that led to UK PM Johnson announcing that England would move into its third Lockdown with the new stay at home rules far more reminiscent of March 2020’s with schools closed and only essential journeys allowed. UK Chancellor Sunak is expected to unveil a fresh support package for UK companies in light of these new tough restrictions which are expected to produce a similar economic impact to that seen in March and April last year.

Georgia run-off

The other event keeping New Year optimism in check is the Georgia Senate run-off. This is clearly key in determining which party has control of the Senate and therefore whether a blue sweep can be achieved. Back in November the market’s base case was that the Democrats would win every race and this would give them the flexibility to launch substantial stimulus in Q1 2021. Once this didn’t immediately materialise, investors warmed to the idea of a split Congress as this would curb the chances of tax rises, tougher regulation and other less economically positive reforms. As we approach today’s election, the Democrats are ahead in both seats, albeit it narrowly, and investors are not entirely sure which side of the coin they want the race to land.

What does Brooks Macdonald think

A Democrat clean sweep or a split Congress both have benefits and negatives but our instinct is that a split Congress would be more market friendly as it retains the status quo and financial assets will look through the positives of US Fiscal Stimulus quite quickly as compared to broader reforms. Even if the Democrats do take both seats, and VP-Elect Harris is left with the deciding vote in the Senate, the current filibuster rules will stop contentious legislation. If we do see a blue sweep, markets will look very closely at any suggestions from the Democrats that they would look to remove the Filibuster from the next Senate session.

Regular daily updates like these are a useful method of frequently updating your holistic view of the markets, especially given the way the world is rapidly changing by the day with Coronavirus.

Please continue to utilise these blogs to help inform your own views of the markets.

Stay safe and well

Paul Green


Team No Comments

Jupiter Asset Management: All I wanted for Christmas, a deal

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.

Keep safe and well.

Paul Green


Team No Comments

Markets in a Minute: Markets rise over the week, but mood is soured by virus worries and Brexit

Please see below for the latest Markets in a Minute update from Brewin Dolphin, received yesterday evening 22/12/2020:

Global equity markets moved mostly higher over the past week, as the vaccines programme boosted optimism and an agreement on the US stimulus package edged closer. Eternal hope of a Brexit deal helped the more UK-centric shares and European markets. The FTSE100 has been an underperformer, however, as the dollar has been weakening relative to sterling, squeezing the earnings of FTSE’S multinationals, which gather most of their revenue in dollars. The ongoing dollar slide helped push commodity prices higher, and bitcoin briefly hit a record $23,000 amid a flurry of speculation, although nobody can really gauge its true value.

Last week’s markets performance*

• FTSE100: -0.26%

• S&P500: +1.25%

• Dow: +0.44%

• Nasdaq: +3.05%

• Dax: +3.93%

• Hang Seng: -0.02%

• Shanghai Composite: +1.42%

• Nikkei: +0.41%

*Data for week to close of business on Friday 18 December

Equity markets pull back at start of week

News of the virus mutation in the UK, and resulting restrictions on the movement of people and goods to numerous countries led to a sell off in many markets around the world on Monday. The FTSE100 closed down by 1.73% at 6,416.32, and the FTSE250 ended 2.11% lower at 19,962.11. In Europe, the pan-European STOXX 600 index fell 2.3% after the UK announced its tougher restrictions in response to the vaccine, and the EU’s largest market, the German Dax, fell by 2.82%. Reaction was more muted in the US, where the S&P500 lost just 0.4%, while the Nasdaq lost 0.10%. The Dow closed up by 0.12%.

US stimulus bill passed

The long-awaited US stimulus package to extend unemployment benefits and fund a range of other pandemic-related expenditure was passed on Monday night after nearly six months of wrangling. The package, worth $900bn in total, will send one-off cheques worth $600 to households, with extra payments for children. It will also extend unemployment benefit payments worth $300 a week for those who are out of work due to Covid-19. These payments will last until March and give the vaccination programme time to take effect. However, President-elect Joe Biden has signalled he will look to pass a larger bill once he takes office in January.

Markets sensitive to risk

There is a lack of liquidity in the market at the moment, as many traders have started their Christmas breaks and there is less money flowing into shares and bonds. This can make markets quite volatile, and there is no denying that the newsflow right now is quite alarming. We heard of the new strain of Covid-19 emerging from the UK, prompting Tier 4 containment measures in London, the south east and parts of eastern England over the weekend. In Europe, there are concerns surrounding movement of people and goods which has led to travel constraints. This could have an impact on the economy – and our lives – unless some resolution is reached quite quickly.

This bad news linked with a lack of progress on Brexit, with travel restrictions making negotiations harder, led to weakness in UK and European markets at the start of the week. However, the pound has recovered its losses, indicating that investors are perhaps taking stock and realising that this is probably not as frightening as the headlines first seemed. There were hopeful headlines on Tuesday morning about a compromise on fishing quotas, but there is no firm news of progress. We must wait to see how this plays out in the coming days, but markets will be jittery until the end of the year at least; even if a deal is agreed, it needs to be cleared by the EU member states which will not happen until the new year. The US, meanwhile, was far calmer, with the Dow even closing with a small gain, as the US stimulus bill was passed.

Economic resilience Taking a broader view, the global economy is holding up better than expected given such challenging circumstances. Many UK businesses had reported activity improving in December. The IHS/Markit flash composite purchasing managers index, which measures business levels compared to the previous month, rose to 50.7 in December from 49 in November. A reading above 50 indicates business is expanding. The services element of the index, which covers leisure and hospitality, rose to 49.9 in December from 47.6 in the previous month, suggesting business levels are still falling. Yet the data was still better than anticipated and shows the economy holding up relatively well. PMIs in the US were even stronger, with the businesses saying that activity levels were improving, especially in the manufacturing sector.

All in all, there is a sense of confidence that the global economy will get through this very challenging period and emerge to recover next year, as things return to normal. On a 12-month view, we remain optimistic on equities, although it could be a bumpy ride until as sentiment rises and falls along with the headlines.

Brewin Dolphin regularly give us their insight of the markets. Updates in this efficient manner are a quick but well-informed way to update your consensus view of the global markets.

Please keep using these blogs to regularly update your knowledge of current market affairs from around the world.

Keep well and all the best

Paul Green


Team No Comments

Blackfinch Group Monday Market Update

Please see below for the latest Blackfinch Group Monday Market Update received by us today 21/12/2020:


  • Talks continued in the hope of finding a solution in the Brexit negotiations.
  • Data showed redundancies hit a record 370,000 in the third quarter of the year, with the unemployment rate rising to 4.9%.
  • UK inflation slowed again in November, to 0.3% from 0.7%, with prices weighed down by retailers cutting prices during ‘Black Friday’ sales.
  • The Bank of England voted to leave interest rates on hold and revised its expectations for the decline in gross domestic product in the fourth quarter, from 2.0% to a “little over 1%”.
  • UK retail sales fell 3.8% month on month in November, although economists had predicted a decline of more than 4%.


  • Talks continued over a further stimulus package, with the deadline fast approaching.
  • The Electoral College ratified the November presidential election result, with each state voting in line with their electorate to confirm the upcoming inauguration of Joe Biden and Kamala Harris.
  • US retail sales fell further than expected in December, declining 1.1% month on month.
  • The US Federal Reserve announced it will buy at least $120bn of bonds each month until substantial further progress is made towards its maximum employment and price stability goals.
  • First-time jobless claims data came in above expectations in the week to 12th December, climbing to 885,000.


  • The Bank of Japan extended its virus-related corporate lending programme by six months to September 2021, while making no changes to its monetary policy.


  • The US began its vaccination programme, with the first three million doses of the Pfizer/BioNTech vaccine distributed for use across all states.
  • The US Food and Drug Administration approved the vaccine developed by Moderna for emergency use.
  • News broke of a new variant strain of COVID-19 that has become prominent in London, the South East and Eastern England.

These articles provide concise well-informed views that cover the whole of the market and are useful to maintain your up to date view of the markets globally.

Please keep reading our blogs regularly to give yourself a holistic and up to date view of the markets.

Keep safe and well.

Paul Green


Team No Comments

Blackfinch Group Monday Market Update

Please see below for the latest Blackfinch Group Monday Market Update received by us today 14/12/2020:


  • Despite pushing past many self-imposed deadlines, talks continue over a potential Brexit deal. Boris Johnson has, however, suggested that a no-deal scenario remains the ‘most likely’ outcome.
  • UK gross domestic product (GDP) grew by 0.4% in October, 23.4% ahead of its low in April. However, this remains 7.9% below pre-pandemic levels.
  • The UK total trade surplus, excluding non-monetary gold and other precious metals, decreased by £6.5 billion to £0.8 billion in the three months to October 2020, as imports grew by £14.3 billion and exports grew by a lesser £7.8 billion
  • The Halifax House Price Index rose 1.2% month-on-month in November. Data showed that house prices were 7.6% higher in November than the previous year, the highest year-on-year gain since 2016.
  • Market research group Kantar released grocery market share data for the period ending November 29th, indicating the largest month ever for the grocery market, with £10.9bn spent in stores and online. Data showed that the average British household has spent over £4,200 on groceries this year.


  • Talks continue over a further stimulus package, with the initial deadline of the 11th December extended. Multiple Federal support schemes designed to help the unemployed and to protect renters from eviction, are due to expire in the new year.
  • Figures to the 5th December showed that 853,000 Americans filed for unemployment, the highest level in eight weeks, as new lockdown measures began in multiple states
  • It’s believed that the US government is preparing to sanction a number of Chinese administration officials for their perceived undemocratic actions in the Hong Kong election


  • The European Central Bank (ECB) has increased the size of its COVID-19 stimulus package by €500bn, as well as agreeing a nine-month extension. In a speech announcing the measures, the bank’s president Christine Lagarde commented that sufficient herd immunity may be reached by the end of 2021 to allow the economy to function under more normal circumstances.


  • The first COVID-19 vaccines were rolled out in the UK, with the US expected to follow suit next week
  • Researchers conclude that the vaccine in development by Astrazeneca and Oxford University is 70% effective based on trials of over 20,000 people
  • Sanofi and Glaxosmithkline suffered a setback in their vaccine research, which is expected to push the timeline for deployment to the second half of 2021, should their candidate receive the necessary approvals

These articles provide concise well-informed views that cover the whole of the market and are useful to maintain your up to date view of the markets globally.

Please keep reading our blogs regularly to give yourself a holistic and up to date view of the markets.

Keep safe and well.

Paul Green


Team No Comments

Brooks McDonald Daily Investment Bulletin 25/11/2020

Please see below for Brooks McDonald’s latest Daily Investment Bulletin, received by us this morning 25/11/2020:

What has happened

The US market hit another all-time high yesterday as the vaccine backdrop mixed with positive news around the US transition and expectations that Janet Yellen will be appointed Biden’s Treasury Secretary. The bias towards non-tech stocks continued with the equal weight US market outperforming the traditional index yet again.

Vaccine update

As more vaccines are revealed we expect the pace of news flow in this area to increase and yesterday Sinopharm submitted an application to bring its vaccine to the Chinese market. The Sinopharm vaccine has already been approved for emergency use and has been rolled out quite widely already. Official approval would also open the door to exports to the number of ASEAN countries that have bought the vaccine. This could be a meaningful step for countries without access, either due to economic or political factors, to the cheap Oxford/AstraZeneca vaccine. On the latter vaccine we saw information that the half dose followed by full dose combination which achieved 90% efficacy was only administered to those under 55. This may suggest the population wide efficacy of that strategy is far lower but that isn’t necessarily a problem. Higher cost (financially and logistically) vaccines with high efficacy can be used for those most vulnerable but the cheaper vaccines with equivalent efficacy only in younger cohorts, can be used for herd immunity.

UK Spending Review

Today will see the long-awaited announcement from the UK Chancellor on the state of the UK’s Public finances as well as detailing some short-term next steps. Importantly this is only a one-year review which has been scaled down given the uncertainties of COVID (and indeed Brexit). The tone of the announcement is likely to retain a focus on supporting the economy and jobs short term with the FT reporting that a £4.3bn employment plan will be revealed. That number is however relatively small compared to the numbers in March and this reflects the new context of a far tighter fiscal backdrop coming into 2021, something that will be outlined during the speech.

What does Brooks Macdonald think

The formal budget was deliberately pushed back as the UK economy simply couldn’t handle fiscal tightening when we are in a period of rolling lockdowns. Even next year the government will need to strike a cautious balance between getting public finances back on track and not derailing a delicate recovery which would ultimately generate a need for more fiscal support down the line.

These articles provide concise and well-informed views that cover the whole of the market and are useful to maintain your up to date view of the markets globally.

Please keep reading our blogs regularly to give yourself a holistic and up to date view of the markets.

Keep safe and well,

Paul Green


Team No Comments

Blackfinch Group Monday Market Update

Please see below for the latest Blackfinch Group Monday Market Update received by us today 02/11/2020:


  • Infection rates continued to climb, with talk of a second national lockdown becoming more prevalent towards the end of the week
  • According to the Confederation of British Industry, retail sales fell in the year to October. The group surveyed 116 firms, of which 54 were retailers, and highlighted a loss of momentum from September
  • The Bank of England (BoE) entered consultation with UK banks about the potential for allowing them to resume paying dividends
  • Data from The British Retail Consortium showed that prices in UK shops fell by 1.2% in October, after falling 3.2% in September. Prices for non-food items also fell 2.7% month on month
  • Net mortgage borrowing increased to £4.8 bn in September, from £3.0 bn in August, according to the Bank of England. Mortgage approvals for house purchases reached their highest level since September 2007, at 91,500


  • House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin continued to be unable to reach an agreement on a stimulus package
  • Latest gross domestic product (GDP) figures showed that the US economy grew by 33.1% in the third quarter, following a fall of 31.4% in the second quarter. Expectations had been for an increase of 32%
  • In the week to 24th October, new jobless claims fell to 751,000, better than forecasts of 770,000
  • Daily new infection cases reached record highs, with over 100,000 infections reported on 30th October
  • New home sales fell short of consensus, with 959,000 sales reported in September, below expectations for 1.03 bn homes to have been built


  • France, Spain, Germany and Ireland all imposed further restrictions on movement in a bid to slow rising infection rates
  • The European Central Bank left rates unchanged. Head of the bank Christine Lagarde suggested there was ‘little doubt’ that the bank would act in December to loosen monetary policy further
  • GDP across the region increased by 12.7% in the third quarter, ahead of the 9.4% growth expected. France, Spain, Germany and Italy all posted forecast-beating figures


  • South Korea GDP grew 1.9% in the third quarter as compared to the previous quarter
  • The Bank of Japan made no changes to its monetary policy settings, as expected. However, it did trim its growth forecasts to reflect sluggish service spending through the summer months


  • The UK’s Medicines and Healthcare Products Regulatory Agency announced that it has started accelerated reviews of the vaccines in development by both Astrazeneca and Pfizer. This is in the hope of enabling the UK to approve the first potential jab as quickly as possible

These articles provide concise well-informed views that cover the whole of the market and are useful to maintain your up to date view of the markets globally.

Please keep reading our blogs regularly to give yourself a holistic and up to date view of the markets.

Keep safe and well,

Paul Green


Team No Comments

British Land update improves sentiment towards commercial property sector

Please see below for AJ Bell’s latest market updates, published 09/10/2020 and received over the weekend. The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the current position with UK real estate:  

British Land

“As an investor in many different types of commercial property British Land is a good bellwether for UK real estate.

“This is why its positive trading update, with rent collection trending in the right direction and the decision to reinstate the dividend, is firing shares in several of the London market’s property stocks on Friday.

“Particularly notable is the recovery in retail – with figures suggesting footfall and sales across its portfolio of shops and shopping centres weren’t too far off pre-Covid levels in September.

“The company has also managed to sell some retail assets above book value – though it looks like these are in more robust areas of retail like large standalone DIY stores.

“So far, the tighter restrictions being brought in don’t appear to be having an undue impact on shopping, though weakening consumer sentiment won’t help.

“And the CVAs dreaded by landlords are a growing menace for British Land as troubled retailers look to reduce their rent bills.

“In a sign the business might face a longer term problem with its offices – occupancy here is way, way down as you might expect given the Government U-turn from ‘return to work’ back to ‘work from home if you can’.

“The question is whether there is a tipping point at which office tenants decide they no longer require a large central hub for their workers.

“We are probably not there yet, but what could happen is a shift away from sites, like those in central London, where there is a reliance on public transport towards locations outside city centres which have plenty of car parking.

“Ultimately there are arguments for businesses retaining their offices in the medium term. After all, working from home isn’t a viable option for everyone, more space might be required to comply with distancing requirements and there are advantages to having people physically on site, particularly new starters.”

Commercial property is a key diversifier for investor’s portfolios. Good bricks and mortar property funds work well over the long term but have liquidity issues hence some peoples’ preference for property shares.

Please keep using these blogs to keep your market views up to date and holistic.

Stay safe and all the best

Paul Green


Team No Comments

As the midnight hour draws near, how will Brexit conclude?

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.

Stay safe.