Brexit and the Budget
All eyes are currently on Philip Hammond in the run-up to the Budget – and here at Wellesley, we are keeping a particularly close eye on potential changes to pensions, and what it could mean for our clients. However, the government said last week that there is no clear consensus for changing tax relief on pensions, despite the Treasury report last year suggesting it was ripe for reform. Yet Steve Webb, former Pensions Minister, told the press that some changes within the current structure were still feasible.
The Budget was, in theory, brought forward to avoid it being affected by the politics of Brexit discussions. However, this was shown to be impossible last week, as the DUP threatened to vote against the Budget if the integrity of the UK was compromised by the Brexit deal.
Meanwhile, those favouring a Brexit deal could see positive signs last week, as increasingly hopeful noises from both London and Brussels hinted at the beginnings of a deal. However, those hopes were crushed at the weekend, as talks between Dominic Raab and Michel Barnier broke down over Northern Ireland backstop arrangements, all but ruling out a deal being agreed at this week’s European Council meeting. Furthermore, David Davis encouraged Cabinet members to vote against Theresa May’s proposed deal.
The Chancellor now has quite a job to present a Budget that angers neither Brexiteers nor Remainers, seeks to address the UK’s fiscal deficit and also signals the imminent end of austerity, while keeping an eye on any possible general election.
Positive Q3 signs for the UK
This week there was promising news for the UK, as, following a slow August, figures suggested positive economic momentum in the third quarter overall. This offered some encouragement in light of the recent subdued figures, which were encapsulated by Capital Economics’ comment that “Our forecast is for growth of 1.3% [this year], which would be the weakest annual expansion since the financial crisis”.
The International Monetary Fund’s new research paper offered little comfort, as it criticised the state of the UK’s public finances, which are among the worst in the developed world. This is due to the UK’s lack of assets (sold off in the privatisations under the Thatcher administration), net liabilities (reaching over £2 trillion) and the fact that the UK is heavily exposed to inflation due to the index-linked nature of much of its debt. IMF therefore advised that the UK should allow for greater public spending and taxation to cushion the fallout from a hard Brexit.
Mixed messages in global markets
This week, global markets were as unsettled as the weather, until investors were reminded of positive economic and business trends.
Earlier this year, Betterment, a New York-based online investment company, conducted a survey to gauge public impressions of equity market performance. A significant 48% of those polled said they thought the stock market had failed to rise in ten years, while 18% said they thought it had gone down. They were wrong:
“From the previous peak, on 9 October 2007, the stock market is up 137%. Any way you slice and dice this one, the market definitely [isn’t] flat or down over the past decade,” reported EdgePoint, co-manager of the St. James’s Place Global Equity and Global Growth funds, in its quarterly review last week. “If an investor simply bought [the market] in 1980 and held it these past 38 years through all the market drama, they would have made 11.8% a year.”
Unfortunately, many investors are prone to panic at the falls during periods of volatility. Last week – a week characterised by storms and floods – the S&P 500 experienced its largest weekly fall in six months, with 4.1% of paper losses. The STOXX Europe 600 also experienced its worst day in four months, the FTSE 100 fell below 7,000, the TOPIX in Japan suffered its worst single-day drop since March, and the MSCI World Index finished down some 6%. The most apparent cause of the falls was a spike in the yield on the 10-year US Treasury; the yield on US government debt rose to a seven-year high.
Early signals this week offered only mixed messages as to whether this trend might persist but, while the impact of investor nerves was fairly indiscriminate, some sectors have been worse affected than others. Yet we have been here before; as recently as February, a similar spike in Treasury yields caused a 10% plunge in the S&P 500. On that occasion, the slide was soon reversed.
Third-quarter earnings show the real story
Third-quarter earnings got under way on Friday, demonstrating to short-term market speculators that the real economy always matters on markets. JPMorgan Chase, the US bank, was the first major company to report; it beat expectations, benefiting from growth in its consumer banking division. Wall Street analysts also predict healthy earnings for US blue chips more broadly, with a consensus forecast of a 19% rise in earnings per share.
The resilience of the global economy
The continued resilience of the global economy may be the most important trend for investors to cling to, even as geopolitical and trade tensions continue to mount. These trends are all the more comforting given the US tariffs on 50% of imports from China, and China tariffs on 68% of imports from the US.
“Investors should be wary of being distracted by the cacophony of noise from politics – Italy, Brexit or the ups and downs of the Trump White House,” said David Riley, Chief Investment Strategist at BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund. “That’s not to say political developments are unimportant – politics is more important than ever – but investors should not lose sight of the fundamental drivers of future returns – growth, corporate earnings, and valuations. Global growth is strong and it is not just a US story. The European economy is running above trend as unemployment is falling and corporate fundamentals are improving. The most important driver into the end of the year in asset markets will be relative growth performance of the US compared to Europe and the rest of the world.”
BlueBay and EdgePoint are fund managers for St. James’s Place.
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