Monitoring the markets on your behalf, our Asset Allocation Team help you stay one step ahead. Here, Richard Flax discusses how the Conservative leadership contest could impact the impact of Brexit.
Equity markets had a tough time in May, falling around 2-2.5% in sterling terms. That reverses some of the optimism that we’ve seen over the past few months.
Trade disputes loomed large in May. The ongoing saga between the US and China caught the headlines, but we also saw increasing tensions between the US and Mexico, with a focus on immigration and the US and India.
The concern here is that weaker global growth could translate into slower earnings growth for companies and weaker corporate profitability. On the other side the prospect of slower global growth has begun to impact market expectations about interest rates. In particular, financial markets now expect the US Federal Reserve to cut interest rates over the coming months.
One other area of attention is really around the regulation of technology companies.
This has been in the news for a while, but more recently we’ve seen the US Department of Justice take an interest in a couple of the large technology companies with regard to antitrust.
The concern here is that some of these companies have become too big and too successful and are beginning to dominate their markets in anti-competitive ways.
Now some of the more dramatic solutions that have been proposed seem to us unlikely, at least at this point – breaking some of these companies up for instance – but there is a concern that these companies would be forced to operate under greater regulatory scrutiny and this could impact some of their profitability and their growth going forward.
Back at home, the outlook for Brexit remains as murky as ever. Whoever becomes Prime Minister, the problem still doesn’t change; what sort of deal can get through Parliament?
As of now, come October 31st, the UK will leave with no deal and the likelihood of an extension beyond that date, either from the EU or from the UK government, is unclear. We continue to believe that a No Deal scenario would be negative for UK assets.
From a portfolio construction perspective, having a globally diversified portfolio should help to insulate clients from some of these UK’s specific risks.
So in the short term we see some challenges facing the global economy. Overall we’re comfortable with the relatively conservative positioning of most of our portfolios.
It is reassuring though that some of the excess optimism we saw earlier in the year seems to have been tempered. If we do see market volatility pick up, we think we’re well positioned to take advantage of some of the opportunities that this may create.