Nothing Ruled Out
Political volatility has been a high for a number of years in both the UK and in international markets, and this uncertainty has escalated further in recent months. As Prime Minister, Boris Johnson, has used aggressive tactics in pursuing a revised departure deal from the EU, and with this, the chance of a no-deal departure has increased. Unhappy at this direction, Parliament is increasingly at odds with the Government, with MPs and the PM engaged in manoeuvres. The Government has lost its parliamentary majority, and therefore a General Election seems likely in the coming months, yet, in the meantime, Mr Johnson continues to search for alternative avenues through the current impasse. As such, few Brexit outcomes can be ruled out, at this stage.
On the whole, market participants view a hard Brexit as damaging to the UK economy and currency markets are the clearest way to see this. Sterling fell heavily following the EU referendum in 2016 and it has experienced renewed falls since Theresa May’s failure to get the Withdrawal Agreement through parliament. Precise currency predictions are extremely difficult to make, but should a no-deal exit occur then we will likely see further falls in the value of the British pound. What this will do to stock markets is more nuanced, however. Stocks focused on the domestic economy have suffered at times when momentum has shifted towards a hard-Brexit, or indeed a no-deal departure, and this trend will likely continue. Stocks with significant overseas earnings, however, have a major cushion in the form of a jump in the value of these earnings when sterling falls. This is why, the FTSE 100, whose constituents, on average, have a high proportion of non-sterling earnings, performed very well following the EU referendum of June 2016. This trend has continued in the three years since and, in our view, should a no-deal occur, looks likely to continue; with internationally focused stocks outperforming domestically orientated companies.
Consider All Factors
Brexit is a key concern for most in the UK, but for investors it should not be the only consideration. A more important factor in the overall direction of markets, both in the UK and globally, is the US/China trade war. Fear in markets has been growing since early 2018 as Donald Trump pushed a policy of protectionism. Escalating tariffs between the US and China have been the main manifestation of this and with each occurrence, stock markets around the world have suffered. De-globalisation, such as we are seeing from this this trade war, has the potential to trigger the next global recession. While we don’t think we are there yet, the situation needs careful monitoring. Political machinations are at the heart of current investment market instability. Predicting the exact outcomes will be extremely difficult and therefore investment portfolios should be carefully monitored, diversified and managed in collaboration with professional financial advice.
Please note that the contents are based on the author’s opinion and are not intended as investment advice. This information is aimed at professional advisers and should not be relied upon by any other persons. Any research is for information only, does not constitute financial advice or necessarily reflect the views of the author and is subject to change. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the fund is suitable and appropriate for their customer. Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise and investors may get back less than they invested. Important information about the funds can be found in the Supplementary Information Document and NURS-KII Document which are available on our website or on request.
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