The trade dispute between the US and China continues to be in focus for investors. A knee jerk reaction from Trump, increasing tariffs and subsequently making some concessions buffeted markets. While the news flow on the issue causes significant daily moves, longer term this appears to balance out to very little as most market participants are now working on the assumption that this dispute continues for some time. With so many underlying issues over an above the headline bilateral trade deficit, it is also our base case that the additional tariffs remain in place or escalate.
Recent attacks on Saudi oil facilities has increased the likelihood of significant conflict in the Middle East one more. We are yet to know the full reaction of the Saudis and Americans to the attacks, blamed on Iran, but they are unlikely to go unanswered. This probably will only lead to further attacks.
Last quarter finally saw the fall of the Theresa May government. A subsequent leadership race led to Boris Johnson defeating Jeremy Hunt and eight other candidates. Boris quickly reorganised the cabinet, seeing a raft of resignations and dismissals, and promotion of Leave supporting ministers. A change in stance towards a no deal spooked the markets, with investors quickly pricing in their increased probabilities of such an outcome. This led to a further depreciation of the Pound and continued pressure on domestically focussed UK stocks. Speculation of an election and defections from the Conservative party led to increased Sterling volatility as investors continued to be confused what it would mean for the path to Brexit. Nevertheless, actions from remain supporting MPs meant that no-deal Brexit fears ebbed, and Sterling rose back to some extent.
Regarding our management of the situation, little has changed. Given the low valuation of UK equities, which should ultimately be supportive regardless of the outcome, the primary risk is in the value of the currency. Sterling has persistently been the primary voting mechanism for investors view on the outcome of Brexit. The issue is that from its current level the Pound could rally or fall significantly and rapidly. The movement of the currency so far will have already taken the sting out of any negative moves going forward, although a significant fall is still on the cards.
The impact on portfolios of a movement in currency can be significant. A sharp fall in Sterling from a hard Brexit may well prove to be a net positive as holdings in international equities and UK large caps rise in Sterling terms. Conversely, a “positive” Brexit outcome, where Sterling and UK assets rallied, will prove to be constructive on an absolute and relative basis. However, we do not believe that changing the positioning of portfolios based on this to be prudent. While we have looked not to take excessive relative risks, some are still present.
The US Presidential elections will be coming into increasing focus for investors as the race for the Democratic nomination heats up. Potentially, there is some downside for markets if one of the more left-wing candidates looks like they might win the nomination (eg. Bernie Sanders, Elizabeth Warren). These candidates are running on a mandate to increase social security spending and increase taxes on corporations and the wealthy, both of these would be negative for markets. The standard discussion around the cost of healthcare is also likely to cause volatility in Biotech stocks, as seen in previous election cycles.
The election of the Democrat nominee will begin in February through to June 2020. The front runners to go up against Trump are currently Elizabeth Warren, Joe Biden and Bernie Sanders. The election day is November 3rd.