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Weekly comment: 02.12.19

Market overview: Chris Beckett, Head of Research

With only 10 days to go until the UK election politics dominate news bulletins but does the outcome matter to an equity investor.  Stock markets are very good at adjusting prices to current expectations so it is only changes to those expectations that normally materially affect valuations.  Most pollsters and pundits currently expect Boris Johnson to achieve a working majority so we would expect reactions to this outcome to be fairly muted (not least because we will have to wait for at least a year, and probably longer,  to see to the shape of our future trading relationships).

It is the unexpected, but still possible, outcomes of a hung parliament or Labour majority that would have larger implications , positive and negative respectively, for stock prices.  A hung parliament would extend political instability but increase the chances of a very soft Brexit or no Brexit at all while a Labour majority would create real risks to several industries in the form or nationalisation or unfavourable regulation.  It is a quirk of a first past the post parliamentary system that small changes in public opinion over the next ten days could have large implications to the outcome of the vote.

Whatever the composition of the next government spending is likely to increase supporting economic growth but increasing the national debt which may become a bigger issue over the long term.  The election may give us some certainty on UK politics but heightened political risk is something we will have to live with.  The US presidential election is less than a year away and what happens there is more important to a UK listed multinational company than the results on 12 December.

Economic overview: Richard Carter, Head of Fixed Interest

Investors continue to be troubled by political uncertainty but there has been better news recently on the economic front. The latest round of data suggests the global economy has begun to shrug off the negative impact of Trump’s trade wars with most manufacturing PMIs picking up in November. Foremost among these was the Chinese PMI which rose into expansion mode for the first time since April but Eurozone readings also improved. Hopefully this rebound will continue but that may depend on whether US-China trade talks reach a positive resolution in the coming days.

On the election front, the latest polls are still pointing to a Tory majority with an average of an 11% lead over Labour while the Liberal Democrat and Brexit Party vote continues to be squeezed. Politics in Germany is also in a state of flux and the junior coalition party, the SPD, elected a new, very left-wing leadership at the weekend. This leaves Merkel’s coalition on shaky ground at a time when the AfD and Green Party are doing well in the polls although some optimistic commentators suggest this could bolster the case for more fiscal stimulus from one of the only developed countries who can actually afford it.

This week will see the release of the US ISM and nonfarm payrolls report.

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