UK
Parts of the UK equity market have staged a predictable rally since the result of the General Election was announced. The key beneficiaries were, as one would expect, sectors such as banks, housebuilders and potential nationalisation targets in the utilities space, many gaining significantly. The more domestically focused FTSE 250 has staged a particularly impressive recovery, as indeed have smaller companies. There is a very real sense of relief pervading UK markets, and one of the reasons for the UK to trade at such a large discount to global peers (it has been at a 35% discount in recent months) has certainly been taken away. The dividend yields on offer from the UK’s high-quality index components are also difficult to find in other markets.
However, a ‘period of reflection’ might leave us somewhat more cautious on the prospects for 2020. Yes, substantial momentum has accumulated, but the fortunes of sterling would appear to be very unpredictable given the position of the new administration on the trade deal issue. PM Johnson is committed to not extending the transition period beyond December 2020 (and clearly has the majority to push this through as policy), and this means the timeframe for negotiating a comprehensive trade deal is narrow. Some experienced diplomats and negotiators are astonished that anyone could even expect this end of year deadline to be hit. This sets us up for very significant levels of volatility for the second half of the year, and positioning around UK assets has to be made in light of this. We have already seen some significant weakness in the currency after the hard-line position re an extension was confirmed, and it could come under sustained pressure as we see announcements from the EU that proposals are not workable etc. Ultimately, the election has achieved the removal of what many saw as ‘Corbyn risk’, but we may have seen an over-reaction from UK equities in some areas. This raises the question: are investors buying the UK based on a long-term view that a trade deal will be done by the deadline, that we will get a deal after an extension (despite this seemingly being against Government policy), or just to enjoy UK equities’ brief six-month period in the sun? Plenty to be sorted still and we are not rushing in yet.
US-CHINA
A complete resolution of the trade dispute between the countries still seems unlikely, but the recent announcement of a Phase 1 agreement did excite markets and create some grounds for optimism. New proposed tariffs will be delayed, and the Chinese have essentially promised to buy more goods from the US (note – does this mean the Europeans take a hit as this ‘switch’ takes place?). All very well, but the major issues around intellectual property theft and technology transfers are matters that seem no closer to being resolved. As we head into 2020 it may be that the demands and expectations ahead of the US Presidential election have a crucial bearing on developments here (the odds are that Trump will survive the impeachment vote in the Senate). Whether China is led on the matter by her hardliners or reformers will also be pivotal. This is yet another area where we think excessive optimism is unwarranted at the current time, and if markets start to price in too much good news now, it might set the stage for a difficult 2020.
Investment Line is written and edited by members of the Mattioli Woods Group investment committee and is for information purposes. It is not intended to be an invitation to buy, or act upon the comments made, and all/any investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances. The value of investments and the income from them can go down as well as up, and you may not get back the amount invested. Past performance is not a guide to future returns.
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