OCM Commentaries

Market Commentary 12th June 2019

By June 12, 2019 June 14th, 2019 No Comments

The All-Important Brexit Issue

The Conservative leadership debate gained momentum this week, with the main focus among the candidates being the approach to break the Brexit impasse in parliament which spelled Theresa May’s downfall. This week, a number of candidates officially launched their campaigns, with the first round of votes commencing on Thursday. As it stands, there are 10 candidates vying to secure the position at the head of the Conservative party, with each outlining proposals for leaving the EU. Conservative MPs will be looking for a strong candidate who can see off the threat from Labour as well as theConservative Brexiteer faction in a bid to unify the party and oversee Britain’s exit from the EU.

As the candidates are filtered down through a series of votes over the coming weeks, it is clear that Brexit will remain the centre of the leadership debate. A new leader is expected to be announced in the week of the 22nd July, leaving a tight timeline to deliver a solution to the Brexit conundrum. In response to the hard lines being drawn by some of the candidates, later today Labour MPs are expected to begin steps to block a no-deal Brexit in the House of Commons in a bid to stop the next Prime Minister from taking the UK out of the EU without a deal. MPs are expected to vote on whether to hold a further debate on a motion which could be used to take control of the agenda from the government in this scenario.

Economic Implications

Earlier this week, the Bank of England (BoE) reiterated the downside risks to the UK economy as a result of Brexit and global trade tensions, however gave little guidance on the future of interest rates.A no deal Brexit would hamper the UK’s long-term growth prospects, with the UK suffering from reduced openness to international trade and less appeal as a business location, however the BoE highlighted that it could still raise rates due to cost pressures from weak productivity and a strong labour market. Should the UK manage a smooth exit from the EU, the BoE could raise rates by more than investors are predicting, particularly given a recent acceleration in underlying wage growth, increasing inflationary pressure. A rate rise seems unlikely given a weakening UK economy and prolonged Brexit-related uncertainty, however the key takeaway is that a rate rise rather than a cut is still being considered by policy makers, contrasting with the approach other central bankers. The ECB is introducing further stimulus and the Fed is expected to start cutting interest rates later this year. A rate increase would be a negative for UK corporates due to an increase in borrowing rates, resulting in a decline in UK equity markets.

Market Implications

While the threat of a General Election still looms over the UK economy, it will be important that the Conservatives secure a strong leader to negate the risks of a Labour government headed by Jeremy Corbyn. As it stands, UK business views a Corbyn government as the greatest challenge second only to Brexit in the coming months, as a labour government is likely to result in higher taxes, nationalisation and a shift in spending policy which could negatively impact company valuations.

Sterling is likely to remain volatile over the coming weeks, with sterling weakening on the prospect of a harder or no-deal Brexit scenario, or appreciating on a smoother Brexit transition. Due to overseas revenue exposure, the FTSE 100 typically gains on a weaker sterling, and declines on a stronger sterling. Our expectations are that sterling will appreciate over the between now and October as a Brexit deal is made, noting that the currency will fluctuate in the near term based on expectations for the new conservative leader and their stance on the all-important Brexit issue.

Global Market Movements

As Brexit-related uncertainty dominated the headlines in the UK this week, the focus around the rest of the world remained on trade uncertainty, as the US-China trade stalemate continued and the Mexican trade issue abated as Trump backed down on his tariff threat following informal negotiations over the weekend. Markets gained over the week overall as participants attempted to force the market higher, however significant risks remain, dragging the market lower as positive economic sentiment continued to abate.

For more information on market movements over the week, please see the attached market update document.

Positioning Implications

Given the risks facing financial markets and considering the irrational behaviour being observed in markets this week, it is our view that the most sensible approach to navigating current market conditions is to remain defensive while we await clarity on the future direction of markets on key monetary policy, trade and political issues. In the UK, Brexit-related uncertainty remains high as the Conservative leadership race gains momentum, with equity markets and sterling being susceptible to increased volatility in the near term. As a result, we maintain low UK equity exposure and mitigate currency risk where required. It is clear that sentiment has shifted to the downside as the second quarter of the year has evolved, and the economic data continues to support our expectations for a further drop back in equity markets.

A series of economic data is due to be released this week which will help to provide an insight into the health of key economies and future policy direction. We continue to monitor all the available data and alter expectations based on new developments.

Key events this week:

  • Wednesday- ECB President Draghi is expected to announce stimulus direction
  • Thursday- The first Conservative Party Leadership ballot
  • Thursday- European finance ministers meet to discuss the Euro-area budget and financialpenalties for Italy
  • Friday- China releases industrial production and retail sales data, the US releases retail salesdata.
  • Tuesday- German Economic Sentiment
  • Wednesday- US Fed Interest Rate DecisionFor anyone who wants further data to substantiate the position please review the attached Global Economic News Document.

Model Portfolios & Indices

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Over the week, most global equity markets gained as investor concerns over protectionism and global growth began to ease earlier in the week, with sentiment attempting to force the market higher. As the week went on, this sentiment dissipated on existing risks and trade concerns, which we expect to continue into this week. As the OBI portfolios remain defensively positioned with limited equity exposure and a downward tilt which benefits when markets decline, our portfolios declined marginally over the week while the benchmarks gained due to a higher traditional equity content.

As we progress from here, it is important to recognise that we should not let benchmark performance make us feel like we have missed out on anything, because although we have in the short term, recent performance shows how quickly this can be reversed given current levels of risk and uncertainty. Overall, it is our view that markets will continue to fall over the coming months before adjusting to the new norm based on lower global growth and weaker corporate profitability. The key point here is to take a long-term view, look at the current level of uncertainty in the global economy, and remember that the portfolio is designed to minimise your exposure to risk and preserve capital. Markets are behaving irrationally, therefore the most sensible strategy is a defensive one given current market conditions.

Important Information

The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the days movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested.

Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.

This Day in History

On this day in 1997, Queen Elizabeth II reopened the Globe Theatre in London. The new theatre was approximately 750 feet (230 m) from the site of Shakespeare’s original theatre, built in 1599.

Gina & Jason

 

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