Market Musings -
Around the World in Three Days: Part Two
Travel around the world in just three days to find out from our Co-CIO, Gregory Perdon what the biggest global trends shaping the financial markets are right now. In this short three part Q&A series, read our thoughts on the five economic blocks which matter most for markets (USA, Europe, UK, China and Japan) and what it means for portfolios.
Q: What are some of the big trends you are currently seeing in the UK? Would you say they are positive?
Some recent data has been encouraging, house prices are up 5% over the past 12 months which is pretty good in the face of one of the steepest recessions we’ve witnessed. We’re also starting to see a decline in the savings rate which should imply an uptick in spending. Mortgage applications are on the rise which indicates people have confidence to return to the housing market. This is definitely positive for credit flows. Further support is also coming from the government in the form of fiscal spending and of course there’s quantitative easing coming out of the Bank of England which helps keep interest rates low and financial markets functioning.
Q: What are your thoughts on Brexit?
The UK continues to operate under the spectre of Brexit negotiations. We don’t know whether it will be deal or no deal, it’s getting messy, both sides think they are stronger than the other, the mood music hasn’t been brilliant. If the recent performance of UK equities is any indication, it would suggest that investors are not very confident in either outcome.
Q: Do you think we’ll see a trade deal with the US or with Europe?
There were certainly hopes of cousinly love with the US, but alas the most recent meeting in August between the UK and the US ended in disappointment. Prime Minister Johnson is now reaching out to the Biden group to hopefully set the stage - we shall see, but sadly we expect nothing this side of Christmas.
Q: What about COVID-19? How are your portfolios positioned?
Right now, headlines are discouraging. As the pandemic rages on, the chancellor, Rishi Sunak has launched multibillion pound schemes to support businesses and prevent a spike in unemployment – which was the right course of action. But, at some point, we believe there will be a price to pay, which may come in the form of tax hikes next year. These won’t be very good for consumption or investment.
There are other issues, for example part of the country is now under micro lockdown, which we expect to continue off and on throughout the winter. We think this will negatively impact demand. We are facing a big uphill battle. I’d suggest letting debt run hot through the flu season. Apologies for being a touch negative, normally I’m more optimistic UK plc.
Q: France has just done something a little surprising, can you tell us more?
You’re right, France has pulled a bit of a rabbit out of the hat – Emmanuel Macron recently announced €100 billion of support for green (and green-ish) infrastructure projects. However, we feel the question that needs to be asked is whether France has shovel-ready projects available – the jury is still out on that, but let’s face it, they do have a good track record with infrastructure. This also dovetails in well with what the European Central Bank (ECB) is trying to do in terms of supporting green bond issuance.
We do think the French have one advantage up their sleeve – the fact the country is used to operating under high levels of structural unemployment might give them a competitive advantage versus other countries in navigating the current circumstances.
Q: How is Germany doing at the moment?
Germany has navigated this challenging period quite well. Some of the economic data has recovered strongly partly thanks to fiscal packages worth over 13% of GDP – something that seemed highly unlikely before the beginning of this year due to the German’s strict fiscal disciplines.
Q: You talk about fiscal stimulus, but what do you think of the region’s monetary policy?
The ECB has been extremely supportive. They have initiated a big bond buying programme and have successfully suppressed downside volatility in the Italian bond market, I only mention this because it’s one of the easiest ways for investors to gauge fear levels in European markets. The next big challenge for the ECB will be reversing the downward pressure on prices – getting inflation back up – which will not be easy.
Q: What does it mean for portfolios?
Although we manage many different types of mandates, as a general observation we have been underweight European and UK equities and are currently not taking any outright positions in GBP.