Political developments drive UK markets as US-China relations dampen hopes for a trade deal
The race to Number 10 intensified this week, as Boris Johnson and Jeremy Corbyn went head to head in ITVs Tuesday night debate, during which around 6 million viewers watched the two lock horns over Brexit, the NHS and leadership. A snap YouGov poll suggested the public were evenly split on who had won the debate, “with most Labour voters thinking Jeremy Corbyn won, most Conservative voters thinking Boris Johnson won”. The BBC will also host a live head-to-head debate between the Conservative and Labour leaders in Southampton on 6 December, plus a seven-way podium debate between senior figures from the UK’s major political parties on 29 November.
Sterling is currently tracking the odds of a Conservative majority, showing a positive correlation with increased prospects of such an outcome. The pound has been strengthening over the past week as opinion polls suggested a Conservative win and as Conservative candidates pledged to support the passage of Johnson’s Brexit deal should they be elected. As it stands, markets favour a Conservative majority government as the best outcome from the Dec. 12 vote, as it would allow Johnson to push through his Brexit plan and move on to the next phase of Britain’s exit from the European Union. On the other side, the labour party have pledged to increase state intervention and nationalise a series of UK businesses- a move which is not welcomed by investors.
Away from domestic politics, a Hong Kong resident who worked for the UK consulate’s business-development team has claimed he was beaten, deprived of sleep and chained in stress positions not uncommon in torture tactics while detained by Chinese agents. In reaction to the claims, British Foreign Secretary Dominic Raab summoned the Chinese ambassador, however a Chinese foreign ministry spokesperson said they would “definitely not accept” the summons – and would instead summon the UK ambassador to “express their indignation”. The developments will likely further damage relations, already strained in recent months by London’s gestures of support for pro-democracy protesters in its former colony.
The deteriorating situation in Hong Kong may prove crucial to the trade talks, with the latest strikes helping end a streak of record highs for U.S. stocks. Donald Trump is expected to sign legislation passed by Congress supporting Hong Kong protesters, setting up a confrontation with China that could imperil a long-awaited trade deal between the world’s two largest economies. China’s foreign ministry has urged the U.S. to prevent the legislation from becoming law, warning the American side not to underestimate the country’s determination to defend its “sovereignty, security and development interests.” The risks of a re-escalation of trade tensions are significant, with a phase one deal still yet to be agreed.
For more information on US-China trade talks, please see the attached Market Update document.
We are not alone!
Earlier this week, we had the opportunity to attend the Citywire Midlands Retreat, an annual event in which wealth managers and investment professionals based in the Midlands get together to discuss key themes, opportunities and challenges facing financial markets and impacting client portfolios. It provides us with an insight into what others in the industry are doing, while allowing us unfettered access to some of the best fund managers in the business to quiz on their thoughts on the economy as well as key sectors and asset classes going forward.
While we gained a lot from the event, our key takeaway was that other professionals and fund managers are just as concerned about the outlook as we are, and are positioning themselves increasingly defensively going into the final months of the year. It is clear that the risks are significant, therefore a cautious approach is recommended. While we knew this from studying the risks, the data and market movements, it sure was nice to have the reassurance that everyone else is in the same position!
Key Events We Are Watching This Week:
- Friday: ECB President Lagarde Speech
- Wednesday: US GDP Growth Q3 estimate
For anyone who wants further data to substantiate the position please review the attached Global Economic Update document and the Economic Data set also attached.
Model Portfolios & Indices
Most global equity markets fell over the week on the back of uncertainty surrounding a US-China “phase 1” trade deal. Markets remained highly volatile over the week as the data continued to indicate a deteriorating economic backdrop while trade, US-China Trade, central bank movements and UK election developments dominated the headlines.
Safe haven assets, such as gold were flat over the week as investors remain uncertain on the near-term outlook of the global economy. The OBI portfolios remain defensively positioned with limited equity exposure, and our portfolios remain well positioned given current conditions. The portfolios gained over the week owing to the defensive positioning, with changes made in recent weeks expected to continue to provide further support to portfolio performance going forward.
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 equity markets will continue to decline 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 day’s 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 1995, the Dow Jones industrial average closed above $5,000 for the first time. The close yesterday was just above $27,821.
Have a great week,
Jason & Gina
