Monday 1st April 2019
Looking beyond 29th March
Last week saw the infamous Brexit date arrive…and pass…without any success in agreeing a deal – thankfully, the Royal Mint had the sense to hold off on stamping its commemorative coins with ‘29 March 2019’. As for the sterling coins already in circulation, their value unsurprisingly proved rather unpredictable over the course of the week, rising and falling with the respective successes and failures of attempts to solve the current impassé.
Yet, for some investors, placing the blame on allegedly ‘feckless’ MPs for the stalemate risks missing the point. Howard Marks of Oaktree Capital Management, Co-manager of the St. James’s Place International Corporate Bond fund, commented: “If Brexit was demonstrably advantageous economically, I would have thought they’d have found out a way to do it in the last 24 months. But all they have done is said what they don’t like. Nobody has found an approach that the majority of legislators liked – and maybe there isn’t one. It’s not one of these deals where people vote for it and the implementation is smooth and easy because it makes so much sense.”
The pound took a hit when the DUP made clear that it wouldn’t back the PM’s deal at the third time of asking, and again when Theresa May lost a third vote on her deal (albeit only the first part of it) – despite her promise to resign should the deal pass. In the face of this volatility, both times the pound soon started to recover, in the hope that the second round of indicative votes, due today (Monday), would initiate some progress. This week may prove decisive for both Brexit and sterling, not least given the growing rupture in the Cabinet.
Anatole Kaletsky, Co-chairman and Chief Economist at Gavekal Research, said: “By removing the hard deadline for Brexit negotiations, the EU has avoided the disaster of a 2008-style sudden stop in business with its second-largest trading partner. The threat was not a deal on WTO terms. It was the lack of a transition period – a sudden stop. That is the qualitative difference between no-deal and all the other options. But in my view, the probability of a no-deal outcome is now zero, which is good for UK assets – just not for gilts.”
It is worth remembering, then, that UK shares have seen almost continuous investor outflows since that day in June 2016 – this could yet reverse. It’s also significant that the FTSE 100 ended up for the week, and that January GDP showed a robust increase from weak December levels. While Brexit developments undoubtedly made their presence felt on markets last week, both in the UK and across Europe, other themes may have mattered more at a global level.
Outside the UK
Meanwhile, the US and China both reported positive economic news this year. Initial US jobless claims are now at multi-year lows for this season, despite weak consumer spending trends, while China has been enjoying a golden period of capital inflows this year. Regarding US-China relations, by Larry Kudlow, Donald Trump’s Chief Economic Adviser, told reporters that trade negotiations could stretch out for months, indicating less urgency to impose sanctions and perhaps a new keenness to reach a deal, too. Markets responded positively on Friday, both in equities and US government bonds, plus the S&P 500 and Shanghai Composite indices both ended up for the week.
Nigel Ridge of BlackRock, Manager of the St. James’s Place UK Absolute Return fund, commented: “Whether we get a sanctions resolution in the US–China dispute is a key theme for 2019. The rhetoric has been more constructive of late and has been a contributing factor to US equities going up this year. Other key themes for the year are the impact of Brexit on the UK stock market and the outlook for interest rate rises in the US. It could be a tough year and I’m convinced that there will be volatility.”