In this month’s 60 Second Market Update we summarise the key events shaping the global economy. Our Investment Manager Alex Neilson then talks to our Head of Fund Research Andrew Summers and Chief Economist Phil Shaw about each of these themes in more detail. Subscribe to our newsletter to receive regular monthly updates.
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Theresa May’s Brexit proposal, agreed at Chequers last week, could now be in doubt following the tumultuous resignations of Brexit Secretary David Davis and Foreign Secretary Boris Johnson. Monday’s string of walk-outs saw the pound fall slightly and the FTSE 100 rise by nearly 1%. A possible leadership contest within the party could cause more disruption in the market, [but, as it stands, a motion of no confidence has not been raised].
The European Central Bank recently announced the end of its quantitative easing bond purchases. Quantitative Easing is when central banks create money to buy bonds from financial institutions in order to stimulate the economy and encourage consumer spending. The fact that QE will be wrapped up by the end of the year actually means that the European economy is in good health but we could see some short-term volatility while the transition takes place.
UK Economic Growth
The FTSE 100 ended the second quarter as one of the better performing markets, and the last four weeks have seen the world cup and heatwave fuel consumer spending. While this is a welcome boost to the UK economy in the short-term, it’s unlikely to have any lasting impact on investments.
Alex Neilson (AN): So some big news this week in the never-ending story of Brexit. We’ve seen a draft plan, we’ve seen two resignations. Is it all up in the air? What do we think?
Phil Shaw (PS): There’s a lot up in the air. Perhaps there are the two major implications from this, and the first one is pretty obvious that Theresa May is under much more pressure, she’s much more vulnerable now to a leadership challenge from within her own party. One thing here is if the hard-line Brexiteers want to topple her and begin to run the process they have to do that fairly quickly.
They have to start the challenge to her leadership before Parliament is in recess, which is less than two weeks now. Otherwise, they’d be left with waiting until the autumn and then electing a new leader and by then it could be the end of the year and everything is sewn up.
The second point is the factions within the Conservative Party are much more willing to challenge the government’s line on EU withdrawal, and here they have to be very careful in the sense that they can threaten to vote against government measures, rebel in Parliament or even introduce their own and vote for those.
But one has to remember that at the end of the process there will be a vote in Parliament and it’s possible that if it looks as though it’s too hard a Brexit, that Parliament will vote against it, in which case the government will be sent back to negotiate with the EU. The result could even be that the U.K. remains in a customs union, which is the polar opposite of what the Brexiteers are trying to achieve. So it’s a finite balance, but certainly we’ve got much more uncertainty now than we had a week or two ago.
AN: So obviously big news, but then is it big news for us as investors?
Andrew Summers (AS): I think as investors it’s always important to try and look beyond the daily headlines and the noise and ask yourselves, “has anything fundamentally changed?” It’s human nature to feel that you need to react to every headline and to every event, but more often than not it’s just as important not to do something as it is do something, and in this particular instance we don’t think that the events of the last few days have fundamentally changed our outlook for our investments.
AN: Talking about the European Union, the other big headline is obviously the European Central Bank tapering quantitative easing.
PS: The European Central Bank stopping its asset purchases is a good news story for the economy because it means that the Euro area economies need less emergency policy to keep going. The real parallel is what happened in the United States, and what we had was the Federal Reserve ceasing asset purchases, then beginning to raise interest rates and now over the past year or so has actually been reversing its quantitative easing and so you can see the European Central Bank following the same course if the economy is strong enough; ceasing QE and the perhaps raising interest rates. Not yet. Perhaps it will take a year or more for them to do that, but that is the policy which we think is on the line further ahead.
AN: From a practical portfolio management perspective, how does that infect us in Click & Invest?
AS: So, as aforementioned, we see this as positive news for the Eurozone, and it reaffirms the positioning we’ve had for some time, which is that as the Eurozone economy gets stronger, it’s best to be positioned in assets that do well when the economy is recovering, so that means stocks and shares rather than bonds, and typically the stocks of companies that do well when the economy is doing well rather than companies which will do better in more difficult economic times.
PS: And indeed, there’s a U.K. read-through here, because the British recovery has been going for some time, the Bank of England raised interest rates late last year, the economy is looking stronger and on the back of that it looks likely that the Bank of England’s Monetary Policy Committee will raise rates again as soon as August.
AN: All very positive headlines, but as we said before, we are slightly de-risking portfolios. Are there any clouds on the horizon? What do we think of the main issues in the world economy so far?
AS: One of the key areas that we’ve been looking at is the anti-trade rhetoric that’s coming out of the U.S., and in particular the tariffs that have been imposed between the U.S. and China and they could expand across the globe. What we’re looking for is signs that this potential trade war impacts economic growth in certain regions that are particularly exposed to trade.
Should we see signs that this trade war is impacting economic growth in certain regions then that will make us less positive on those regions and we will probably sell assets in those regions in favour of other types of investments that will not be negatively impacted should a trade war really break out.
PS: One point to consider is that the tariffs imposed so far are relatively small. The real risk is that this gets out of control and you see an escalation of the row between the U.S. and China and other areas which begin to have a much more material impact on the world economy which really would change the global growth outlook.
AN: Talking about big global events, obviously the World Cup, has it had an impact on the U.K. economy do we think?
PS: The World Cup certainly has had an impact on individual sectors. Of course pubs do very well, restaurants do very well and I’m sure that sales of flat screen TVs have gone through the roof too. In terms of a big macro impact on the economy as a whole, I’m not convinced that there will be one, but of course the England team has done really, really well.