Head of Fixed Interest Research
With politicians and investors now back from their summer holidays, we thought it was a good time to review where we are in the Brexit process and also summarise our thoughts on markets generally.
It is now over five months since Article 50 was triggered, officially notifying the European Union of Brexit. This means we have fewer than 19 months to go before this momentous event occurs. It is hard to argue that much progress has been made so far, or that we have much idea what form Brexit will take. However, the negotiations with the EU do seem to have begun in a fairly positive spirit and, after the release of a number of position papers on issues such as trade, the Irish border and citizens’ rights, we are finally starting to get some clarity around the UK government’s intentions.
The most immediate conclusion from some of these papers is that the topics for discussion are numerous and, in some cases, fiendishly complicated. For example, how do you leave the Customs Union with the EU in order to trade more freely with other nations without setting up border controls in Northern Ireland? An answer may be found but agreeing it and then actually implementing it is clearly going to take a long time, so transition arrangements would appear both necessary and inevitable.
For the time being, the negotiations are focusing on the financial settlement, citizens’ rights and the Irish border and the hope is that enough progress will be made by October to allow discussions to move on to the future trading relationship, but this is far from guaranteed. Theresa May, still trying to recover from her election setback, will also have to reconcile the opposing views of her cabinet ministers on what form Brexit should take while trying to shore up her position ahead of the Conservative party conference in early October.
Away from the political battles, the UK economy has so far held up pretty well. The fact that the unemployment rate is at a 40-year low suggests that the Brexit uncertainty has not had a significant impact yet and some economists believe it never will. However, a few warning signs remain, particularly around the build-up of consumer credit and a stagnant housing market. Consumer spending, a very important driver of GDP growth in the UK, hardly grew at all last quarter, while business investment was also flat. All of this suggests that the Bank of England will keep interest rates unchanged for the foreseeable future, unless wage growth picks up meaningfully from current levels.
From an investor point of view, the uncertainty is unwelcome but goes with the territory. The UK still has plenty of well-managed and profitable companies to invest in but global economic growth is also quite strong at the moment, and there is no shortage of attractive opportunities abroad either in our view.
In all honesty, while Brexit is a massive issue, it is probably not at the top of the list when it comes to global concerns. Clearly, politics in the US under Donald Trump are a big topic and there remains some residual hope for pro-growth tax reform despite all the divisions and scandals that are overshadowing his presidency. Geopolitical concerns, including North Korea, are also to the fore.
However, one of the most important questions that clients ask us is whether the strong returns that we have seen from most asset classes in recent years will be sustained. Our response is that we remain positive on equity markets because, as mentioned above, global growth is quite healthy, especially in the US, Europe and most Emerging Markets. A lot of the focus is on central banks because their low interest rate policies and QE have played a big part in pushing up asset valuations in recent years. We do not see them dramatically changing course, as long as inflation remains fairly low. Furthermore, there is little serious alternative to equity markets at the moment, with bond yields still close to historical lows and cash rates negligible.
Rest assured that we will continue to monitor all these political and economic developments closely and manage portfolios in the best long-term interests of our clients.
Investors should remember that the value of investments, and the income from them, can go down as well as up. Investors may not recover what they invest. Past performance is no guarantee of future results.
Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.