Chief Investment Strategist
Market Update, Alan McIntosh
Last week the UK stock market, or more accurately, the FTSE 100, was a beacon of light in an otherwise drab stage show for global equities, rising by 2%. A weaker pound was the main reason. Sterling fell by 3 cents against the dollar and the euro as the risks surrounding Brexit appeared to elevate. The failure of talks between Labour and the Conservatives around a commonly agreed solution to the Brexit impasse was probably not such a huge surprise, particularly given Mrs May’s intention to announce a timetable for her resignation next month. The decision to bring her moribund Brexit deal back to the House of Commons perhaps is more of a surprise. Having been defeated three times, there is little evidence that any proposed amendments are substantive enough to shift the voting dial much. With a Tory leadership contest about to get underway and a parliamentary recess in the offing, October 31st doesn’t seem that far away.
So why was the UK stock market so chipper?
As mentioned many times before, the UK index, particularly the larger companies within it, are very global, despite being listed in London. Currency movements therefore play a large part in shaping the performance of the businesses as well as the investment returns of their listed shares. A weaker pound positively translates overseas sales, earnings and dividends back into sterling. Close to 80% of FTSE 100 revenues occur outside the UK, so this matters a lot to investors. Even companies that are perceived to have a domestic bias may surprise. Vodafone now has less than 15% of its revenues arising in the UK. The telecoms giant which reduced its dividend last week, declares its pay out in euro. How many private investors would have guessed that?
Economic Update, Richard Carter
Brexit was back in the headlines last week after a brief hiatus with Theresa May’s days as PM looking decidedly numbered. Cabinet will meet tomorrow to discuss adding some sweeteners to the withdrawal agreement but there seems little chance of these succeeding if they do not include a second referendum. In truth, her authority is shot and investors are increasingly focussing on her likely successor and what their policy will be. Given the make-up of the Tory party membership, the winner is likely to have run on a no-deal ticket and this will keep the pressure on Sterling as the next few weeks unfold.
Elsewhere, there has been little sign of a thawing in US-China trade relations while tensions with Iran also continue to simmer. Given that backdrop, central banks are almost certainly on hold for the time being, with bond markets still pricing in a fair chance of a Fed rate cut later this year. Recent economic data has been uninspiring with weaker than expected Chinese indicators and disappointing US retail sales figures.
This week will see the release of UK inflation numbers and Eurozone PMIs. The EU elections will be an interesting gauge of public opinion and the growth of populism in both the UK and Europe, although the results will not be announced until Sunday evening.
Investors should remember that the value of investments, and the income from them, can go down as well as up. You may not recover what you invest. This commentary has been produced for information purposes only and isn’t intended to constitute financial advice; investments referred to may not be suitable for all recipients. Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.