Global equity markets fell sharply at the beginning of the week after Donald Trump issued a barrage of comments, threats and tweets relating to trade. The US President said on Monday that he would immediately restore tariffs on US steel and aluminium imports from Brazil and Argentina, accusing the two South American countries of “presiding over a massive devaluation of their currencies”. Later the same day, the US proposed $2.4 billion of tariffs against France, targeting wine, cheese, handbags and cosmetics in a response to French plans to levy a 3% revenue tax on large tech companies, such as Facebook and Amazon. To top it all off, Trump said on Tuesday that an agreement with China may have to wait until after the US presidential election in November 2020. Global equity markets reacted as expected to the President’s renewed trade offensive, with UK and European equity markets closing more than 2% lower at the end of Tuesday than they opened at the beginning of the week, and US equities falling around 1.75% over the two days.
For more information about US-China trade tensions, please see the attached Market Update Document.
Polls Still Favour a Conservative Majority
Boris Johnson’s Conservative Party appears to be on track to win its biggest majority in more than three decades with a majority of 68 seats in the December 12th election, according to the recent YouGov poll that more closely predicted the 2017 election than standard surveys. Such a majority would allow Johnson to deliver on his promise of getting his Brexit deal through Parliament by January 31st and could also give him some freedom to make compromises in subsequent negotiations with the European Union. Some uncertainty remains however; the Tories are ahead by less that 5% in many key seats, so Johnson must now avoid any major slip ups as we head into the final stretch of the election campaign.
Trumps UK Visit
With little more than a week to go before election day, Conservative strategists crossed their fingers and hoped that the outspoken US president wasn’t about to get involved in local politics as he landed at Stansted airport on Monday evening, ahead of his two-day NATO summit.
The visit unfolded relatively smoothly, defying speculation that his presence could undermine Prime Minister Boris Johnson. Trump insisted that he was “staying out of the election”, repeating only that he likes Boris, and thinks he would do a good job if elected. He also mentioned that he could work with anyone, including labour leader Jeremy Corbyn. Though he spent much of the remainder of the day sparring with French President Emmanuel Macron, the US President did deliver one crucial line about the potential selling of the National Health Service under a Conservative majority – an argument which has become central to Labours anti-Johnson message. When asked whether the NHS could be part of a future US-UK free-trade deal, Trump said, “We have absolutely nothing to do with it and we wouldn’t want to if you handed it to us on a silver plate.” The comment was welcomed by both Conservatives, and market participants hoping for a Tory majority.
The pound reached the highest level against the Euro since May 2017 this week as investors stepped up bets on a win for the conservatives in next week election. It advanced against all major currency peers as polls showed the ruling Tories are holding their lead. As it stands, investors see a Conservative majority on December 12th as the most market positive outcome, as it would allow Johnson to push his Brexit deal through Parliament in time for next month’s deadline and move on to the next phase of talks with the European Union. With just over a week to go, sterling remains highly influenced by the polls day-to-day, but we are also seeing some relief that Trump did not stir up the UK political system with his remarks.
The pound gained as much as 0.9% to $1.31 on Wednesday, the highest since May and around 0.8% to €1.18, the strongest level since May 2017. The currency has acted as a barometer of political risk throughout the Brexit process and has recovered about 9% against the dollar since hitting an almost three-year low in September, on hopes of an end to the uncertainty.
While it is certain that markets will remain volatile in the coming weeks, as we come closer to the UK General Election and a potential phase one trade deal, opportunities are likely to arise, allowing us to benefit from strategic changes in our portfolio. Ahead of the election, should the polls continue to suggest a Conservative majority is likely, it is likely that we will add to our UK small/mid cap exposure, where we see an opportunity for outperformance. We are poised to act to redeploy cash into opportunities as they arise, therefore should we get a phase one trade deal in the coming weeks, we are also prepared to add to Global and European Small/mid cap equity exposure to benefit from favourable market conditions for these stocks. As always, we will keep you updated with any changes to positioning and the data.
Key Events We Are Watching This Week:
- Thursday: EU employment change, GDP growth and retail sales
- Thursday: US Balance of trade
- Monday: UK Balance of trade
For anyone who wants further data to substantiate the position please review the attached Global Economic Update document and the Economic Dataset also attached.
Model Portfolios & Indices
Most global equity markets fell over the week amid growing global trade tensions centred around the US’s ongoing trade wars. Safe haven assets, such as gold gained over the week as investors moved out of equity markets and turned to lower risk opportunities. 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. Please note however, there is a lag in some of the data in our portfolios. Therefore, the positive contribution our short on the FTSE 100 has made to the portfolios in the past couple of days is not yet reflected in the portfolio performance data below.
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.
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 1798, British Prime Minister William Pitt the Younger announced the introduction of Income Tax to help finance the war against France.
Have a great week,
Jason & Gina