UK EQUITIES
Could we really be facing the prospect of no deal with the EU? Most commentators think this outcome would be so unacceptable to both sides that it could not possibly happen. But that doesn’t mean it won’t. The tedious game of political brinkmanship continues, and we are getting close to the wire. An extension beyond the end of the year would probably be politically unpalatable to the Government and we are running out of time. The UK has told the EU the door is closing on talks unless negotiations are stepped up (in our favour) and the EU continues to suggest that we have behaved dishonourably so far. Major disagreements persist with fishing rights, state aid and dispute resolution among the main areas of contention. What looks increasingly likely is that the UK is not going to get the sort of Canada type deal it would see as ideal. It is certainly in the interests of the EU to do a deal – the UK is a hugely important market for its goods, and tariffs on these would be much more damaging than the equivalent effect on UK services. If some sort of sensible agreement can be reached then the UK begins to look quite interesting for investors, notwithstanding the global issue of Covid-19, which has hit this economy especially hard. As we have said before, valuations are attractive relative to developed market peers and if one can look beyond the weakness of the large cap index, there are some fascinating opportunities. The Brexit cloud has hung over the UK market for some time and our low allocations relative to peers reflect this. If you were adventurous after last year’s General Election, then you would have done rather well before the horrors of the spring arrived. This time any deal would be firm rather than transitory in nature so a long-term opportunity may yet emerge. Unloved the UK most certainly is; could we find ourselves faced with a more attractive investment case in the new year? Finally, inflation – will it or won’t it be the bogeyman to an economic recovery. At this stage, though tough to call, we feel reasonably sure the inflation genie remains in the bottle, for now at least.
US
The other major event exercising investors’ minds at the moment is the US Presidential election. President Trump has emerged from having Covid-19 in belligerent mood and continues to try to make the economy, or rather the ‘liberation’ of the economy, a key part of his re-election attempt. Few are giving him a good chance of being successful – his approach to the virus is widely seen as being cavalier in the extreme and at the end of the day, the economy finds itself in a perilous state. He has always talked up the economy as proof of his skills – that may come back to bite him (electorally) despite this current economic malaise being little to do with him. Stimulus talks are going down to the wire and although there is hope some agreement will be reached before the election, this is far from a given. If Biden is as successful as some think he could be – meaning that the Democrats not only take the Presidency but also the Senate to achieve a ‘Blue Wave’ clean sweep – this could have a significant impact for investor positioning. The outcome would probably result in a very significant stimulus package that would make meaningful inflation more of a possibility than it has for some time. This and other policies could provide headwinds for technology stocks and a wider rotation out of growth and into value might finally take place. Ultimately, the market fears a contested election that would bring yet more policy uncertainty and the unfortunate prospect of more civil disorder in an already beleaguered US society. We are not making any large bets around the outcome of the election and will make an assessment of the long-term picture once we have more clarity in the days after the result.
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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