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Weekly comment: 25.11.19

Market overview: Alan McIntosh, Chief Investment Strategist

For such a week of high activity, global equity markets were largely nonplussed. The ebb and flow around the US/China trade talks er, ebbed and flowed. Markets are still of the view that some level of accommodation will be reached in the next few weeks. The announcement that another billionaire, Michael Bloomberg, is entering the fairly crowded list of Democratic contenders for the 2020 US presidential election barely registered.

More profoundly, local elections in Hong Kong saw pro-democracy candidates take control of seventeen out of eighteen districts, leaving Chief Executive Carrie Lamb’s position precarious. Meanwhile in the UK, publication of the party manifestos saw Labour go for broke (pun intended) in terms of spending pledges, while the Conservatives erred on the side of caution, at least compared to earlier indications.

As the UK election date nears, how is this being reflected in UK markets? The pound has tended to act as the barometer of sentiment with regard to election outcomes and Brexit. Having rallied to around $1.29 in the middle of October, when the risk of a no-deal Brexit receded, the exchange rate has largely stayed there .Since October 9, when the pound started recovering, the FTSE 100 is ahead by around 3%. Over the same period, the FTSE 250 is up by nearly 8%. This is not surprising given the larger companies in the FTSE 100 have a greater sensitivity to sterling strength.

Much has been made of the apparent Brexit valuation discount that has opened up in the UK stock market relative to the rest of the world (mainly US) since the referendum three and a half years ago. While there may be an element of truth in this, it pays to be careful. One third of the UK market is made up of oil, mining and banking companies, whose share prices have largely flat-lined over the past three years. This has more to do with lacklustre global commodity prices and low interest rates than any Brexit related factors. Also bear in mind that 20% of the US market is represented by faster growing technology companies whose shares have performed well over the last three years. By comparison, technology represents only 1% of the UK market.

Economic overview: Richard Carter, Head of Fixed Interest

The US and China continue to inch towards a trade deal and investors have welcomed China’s latest move to tighten intellectual property rules, something that the US side has been pushing for. Hong Kong remains a possible bone of contention – especially after Congress passed a bill supporting the protestors – but Donald Trump seems ready to look the other way and secure an agreement with President Xi.

On the economic front, there are some early signs of a pick-up in the manufacturing sector according to the latest European PMIs and we can only hope that we are past the worst. However, readings from the service sector were rather discouraging and suggest the economy overall remains firmly in the doldrums. In the UK, the closely-watched service sector PMI fell to 48.3, a level usually associated with negative GDP growth and Bank of England rate cuts. It’s quite possible that we will see a bounce once the election is out of the way though and we are not subjected to any more vacuous TV debates between sloganeering politicians.

The week ahead will be somewhat curtailed by the Thanksgiving holiday is the US but stateside and UK consumer confidence numbers will be released.  

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