OCM Commentaries

Market Commentary 10th July 2019

By July 10, 2019 October 8th, 2019 No Comments

The Brexit debate rumbles on as economic uncertainty feeds into the UK economy


Over the past week, data continued to suggest that the UK economy is coming under strain as a result of potential uncertainty and declining global growth. In the latest sign of economic weakness, sales at British retailers rose at their slowest average pace on record over the past year, owing to weaker consumer confidence and continuing uncertainty. The UK economy grew at 0.3% on average in the three months to May, beating market expectations of 0.1%, which may create a short spout of optimism, however the downward momentum remains intact as the UK economy is expected to stagnate over Q2 based on weak June PMI data. With sterling weakness persisting and concerns over the declining the UK growth outlook, markets are expecting a more dovish stance from the Bank of England and are pricing in a rate cut in the next 12 months, as central banks around the world adopt an easing bias in the face of economic uncertainty and trade tensions.


Once again, the Conservative leadership contest has taken the spotlight this week, as a head-to-head television debate on Tuesday night between the two remaining candidates Boris Johnson and Jeremy Hunt clashed on the issues of Brexit and UK relations with Donald Trump. Johnson faced pressure from Hunt regarding his promise to deliver Brexit for the October deadline and refused to comment on the British envoy following the leak of diplomatic cables in which the ambassador called Trump’s administration ‘inept’. The pressure is mounting for the two candidates in the run up to 23rd July when the new Conservative leader will be announced.


This week, Labour outlined their positioning on Brexit negotiations, as Corbyn challenged the next conservative leader to hold another referendum before taking Britain out of the EU, as Labour will campaign for remain, contradicting their previous stance on a ‘compromise plan’ set out for Brexit. The shift in Corbyn’s views on Brexit will add to growing tensions surrounding Brexit negotiations within the house of commons.


Over the week, Brexit remained a key concern, as sterling weakened amid a worsening economic outlook and rising fears about a no-deal Brexit under a new Prime Minister. Brexit negotiations have caused growing tension throughout the country as the risks of the UK breaking up increase, however British lawmakers and MPs narrowly approved a measure earlier today which could make it harder for the next Prime Minister to force though a no-deal Brexit by suspending parliament. The possibility of a no-deal Brexit has led investors to fear for the worst, as crashing out of the EU will cause major disruptions to the world’s fifth-largest economy and to its trading partners, however the push for legislation by MPs opposing no-deal Brexit adds further uncertainty to Johnson’s untested measure to honour his October 21st exit promise should he win the leadership contest. With the future UK economic outlook depending heavily on the Brexit outcome, developments in the coming weeks are likely to result in a continuation of volatility in UK equity markets and the pound, therefore it will be key for UK investors to exercise caution prior to the October deadline.


Elsewhere in the world, markets await further information on the direction of US interest rates ahead of Chairman Powell’s semi-annual monetary policy update. Following a series of more negative data on a global scale, all eyes will be on Fed interest rates to determine market movements over the next week.


For further information on Chairman Powell’s policy update and our expectations for rates in the coming weeks, please see the attached Market Update document.


Key events this week:

  • WednesdayUS Fed Chair Powell Testimony & US FOMC Minutes
  • Thursday- US Annual and Monthly Core Inflation Rate
  • Friday- UK BoE Vlieghe Speech

For anyone who wants further data to substantiate the position please review the attached Global Economic News Document.


Model Portfolios & Indices


Over the week, global equity markets declined on the back of better than expected US jobs data, which dampened optimism for a 50bps rate cut in July. While we wait for the outcome of the Fed Powell’s speech later today which may provide some indication on a potential rate cut in the near term, bond markets remain attractive for investors, as risk-off sentiment continues to spread within financial markets. It is clear that geopolitical tensions remain, and as economic data continues to illustrate weakness in the global economy, with risks now tilted towards the downside. As the OBI portfolios remain defensively positioned with limited equity exposure, our portfolios gained over the week, with the defensive barbell within portfolios performing well following the positioning changes made in May.


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.


As shown in recent weeks, the capital preservation strategy is designed to remain flat when equity markets display volatility, with a defensive tilt which means that when markets do decline, the portfolios are well positioned to benefit. 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 1975, English cricketer Graham Gooch made his first test debut against Australia, and was bowled out for a pair. Gooch later went on to become Captain of the England team in 1988, and became the highest scoring batter of all time in 2000, with 67,057 runs in first class and limited-overs cricket. He is also one of only 25 players to hit over 100 first-class centuries.


Gina & Jason