Market Commentary – 8th August 2018
Deal or No Deal?
Over the last 12 months we have not discussed anything substantially to do with Brexit, as it has, to be honest, been boring and repetitive with all parties split politically in line with the electorate. I am therefore today going to say a great deal as it is relevant. As regards to Brexit and whether we have an amicable divorce or not we are now getting to the point where it is exciting to say the least and the action or inaction will have an impact on the portfolios and the underlying performance. We have talked a great deal recently about the end of the cycle and how we are being balanced and defensive in our asset allocation, but for today we remain invested. Our reasons for this are mainly because data is still strong, earnings growth is exceptional and therefore supportive of high equity valuations and because the 10-year US yield is still about 10% below a price point on the yield when it becomes an issue. (The issue is that you can take less risk and get the same yield by investing in a bond than investing in equity). For now, therefore despite our fears of 2019 reflecting a global slowdown and equity declines on the horizon, we are still invested and still at the party and will continue to stay there for a few more months unless something changes in the data or the US yield.
Do we expect a Deal or No Deal?
Based on everything that I read or listen to, we do not expect the Eurocrats to agree with what Teresa May put forward and we do not expect the UK parliament to ratify anything else that is put forward, so we expect not to have an agreed deal, by the October deadline. This is a position that we may have to get to for Europe to realise we are prepared to have no deal and be prepared to go with it for Europe to react and negotiate with equality. At the moment Europe just says “Non” and as deflection we are accused of not giving clarity. The reality is that Europe will not negotiate with one of its biggest trading partners as they still believe that we will stay in or they can bully us to stay in and accept the rules to keep free trade. Either way one side is definitely not giving respect to the other. Ideally, we would not be here, but we are, and we have to deal with it and get the best deal possible or stay as we are, even if the best deal is not a bad deal.
If therefore we are to remain actively invested in equites and bonds for the coming few months and we have no deal with the EU by the October deadline, what do we expect to happen to the portfolio in the short term (between October and end of 2018)?
The simple answer is we expect them to go up in value even if the markets continue meandering sideways for two reasons. The first is that as long as global trade remains strong, Brexit has no material impact on the portfolios as we are not heavily invested in the UK economy as regards to UK revenues and UK sales. We are investing globally and as long as global data remains strong the companies that we are invested in through the fund managers will continue to remain stable. Sterling though will continue to get lower and if that happens it will be positive for our portfolios as we always thought this was the most likely scenario and have maintained overseas exposure in all the portfolios so as to benefit from a capitulation in sterling. Therefore, as we expect sterling to drop as low as €1.06 to £1 or even parity with the Euro and to circa $1.22 to £1 for the USD this will have a positive impact on the portfolios. Ironically as the FTSE 100 companies invests in globally assets and export from the UK if sterling falls in value the revenue goes up so in the short term we see the FTSE 100 rising.
Okay so if in the short term a no deal does not have a negative impact on your portfolio what happens in the medium term if we continue to have no deal (Jan 2019 to December 2019)?
As an optimist I still feel that once Europe knows we are prepared to leave without a deal we will get a deal as negotiations harden and Italy, France and Germany step in as the biggest exporters to the UK. So, as we progress through 2018 I expect optimism to grow that we will get a deal and therefore we expect Sterling to strengthen. So, as we close 2018 and enter 2019 I expect Sterling to strengthen from lows that we will see in the coming months and for equities to fall as we see US interest rates peaking and growth slowing as the benefit of the tax breaks and trade barriers weaken growth, globally.
In summary, we have a short-term opportunity that becomes a medium-term threat as long as global growth and data continues, and US 10-year yields remain at current levels, even if we get no deal. If we continue to get no deal and my optimism is stupidity, then sterling will stay weak and that will help UK exporters, but equities will still fall in the UK as the impact of WTO trade tariffs and complexities associated with them being enforced will have an impact into at least Q4 2019. I have given up airing my opinion on whether it is good or bad economically, because there are so many articles written that are contradictory the truth is that no one knows whether it will be good or bad in the medium or long term, but it will be difficult and painful in the short term without a doubt.
Simplicity says stay as we are and do not rock the boat, but the boat has rocked, and we have to get on with it and be strong, have strong leadership and have a solid plan if no deal is reached so as to ensure that the UK continues to be one of the biggest economises in the world and that we prosper. All I know is that I am a UK citizen with a very colourful European heritage if my DNA profile is to be believed, and if I do not like my governments policies, I vote them out. That is what we are doing with Europe, right or wrong, and I accept the unknown is scary, but I am prepared to work and make whatever happens a success for my clients, my business and my employees.
For anyone who wants further data to substantiate the global economic data position referred to above please review the attached Global Economic News Document.
Model Portfolios & Indices
Over the last week we have seen most of the indices that we track go lower bar the S&P 500 which gained. YTD it is only the US that is showing solid gains with Europe and Asia flat (bar Australia) with China down 16.42% which is terrible. With the nature of globalisation, this growth has impacted the growth of markets and generated market volatility. With the current complexities behind trade wars and geopolitical tensions, the markets want to edge higher, however keep being drawn down based on the market risks. With our model portfolios, OBI is doing what it needs to be doing and increasing returns on the portfolios based on the equity, non-equity split as well as pencilling in for the risks priced into the markets. We remain invested though pragmatically as data remains strong, volatility low, sterling weakening and US 10 year bond yields being below 3.30%.
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 1974, President Richard Nixon resigned as President of the United States to the public in a speech. It was delivered in the White House Oval Office. The purpose of the speech was for Nixon, who had been intimately involved in the events surrounding the Watergate scandal that occurred during his controversial re-election campaign in 1972, to announce to the nation that he was resigning from office. Watergate had cost Nixon much of his political support, and at the time of his resignation, he faced almost certain impeachment and removal from office.
As always have a wonderful week and stay safe.