The Conservative leadership election claimed the headlines this week, as Boris Johnson was named UK Prime Minister on Tuesday, beating rival Jeremy Hunt comfortably by 92,153 votes to 46,656. Following yesterday’s announcement, Mr Johnson formally became Prime Minister following an audience with the Queen, and will now begin to form his cabinet over the coming days. It is clear that his premiership will not be an easy one, with the 31st October Brexit deadline looming and the UK economy displaying signs of weakness, however the new Prime Minister remains optimistic, declaring in his first speech earlier today that “I have every confidence that in 99 days we will have cracked [Brexit]”.
While the appointment of the new Prime Minister removed some of the uncertainty over the UK’s leadership, as we move closer towards the 31st October Brexit deadline we remain no clearer on the future of the UK economy, with the new Prime Minister reiterating in recent weeks that a no-deal Brexit remains an option should no other favourable deal be agreed prior to the deadline. Although the new Prime Minister stressed that Brexit negotiations would be completed by the 31st October deadline, with a further extension to the deadline out of the question and only 99 days remaining prior to the deadline (with the parliamentary summer recess running from 25th July – 3rd September), investors continue to exercise caution as a no-deal Brexit remains a key threat to the UK economy.
In the lead up to the leadership announcement yesterday, sterling plunged to a two-year low as fears of a disorderly Brexit increased, boosting the FTSE 100 due to overseas revenue exposure within the constituent companies of the index. In recent weeks, sterling suffered ten consecutive weeks of losses (the longest on record) amid further downside risks due to Brexit uncertainty. Sterling has since made gains as Boris Johnson took office owing to optimism that the Brexit stalemate could soon come to an end, however investors remain on the fence and await further clarity in equity markets as we edge closer to the Brexit deadline.
In recent months, the UK economy has been suffering as a result of Brexit-related uncertainty and indications of lower global growth, with the Office of National Statistics forecasting a 0.1% contraction in the UK economy in Q2, representing the first quarterly contraction in seven years. At the same time, business investment has significantly declined, and the likelihood of a further contraction in the third quarter is increasing amid growing consumer and investor concerns over a recession. Brexit uncertainty continues to weigh in on market sentiment, and optimism over monetary policy stimulus from the Bank of England have been increasing given economic weakness, however any rate decision is unlikely to come before the Brexit outcome is known.
Away from the UK, European and US Central banks remain in focus after the IMF on Tuesday revised its forecasts for global growth lower and the Federal Reserve is expected to trim its policy rate by 25 basis points next week. The ECB may hold fire on its rate decision tomorrow, though its message will be closely parsed for signs of a September move as the poor economic data increases the pressure on the ECB to deliver stimulus. On the trade front, high level trade talks between the US and China resume next week, with progress expected to remain minimal in this stage of talks.
Despite the greater certainty provided over the UK leadership this week, as Brexit-related uncertainty persists, we remain defensively positioned with low exposure to currency risks (such as sharp movements in sterling). We maintain a low risk, defensive strategy until further clarity is provided on the Brexit outcome and continue to monitor developments and adjust exposure as the outlook changes.
For further information on Q2 corporate earnings so far and the potential impacts it will have on the global economy, please see the attached current positioning document.
Key events this week:
- Thursday- ECB Interest Rate Decision, Amazon & Alphabet Q2 Corporate Earnings
- Friday- US GDP Growth, McDonald’s Q2 Corporate Earnings
Model Portfolios & Indices
Over the week, global equity markets remained relatively flat as investors wait for further clarity on Q2 corporate earnings with an expectation of a -2.7% decline. Although markets are optimistic for potential rate cuts in the near term, global economic weakness becomes more prominent as central banks become increasingly concerned about the global economic outlook in the coming months. Safe haven assets such as gold and 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.
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 2005, American cyclist Lance Armstrong won his record-setting seventh consecutive Tour de France and retired from the sport. Controversially, in a dramatic fall from grace all seven titles were stripped from Armstrong in 2012 after he was charged with the systematic use of performance-enhancing drugs.
Jason & Gina