WeeklyWatch – Brexit tensions escalate amid US-China trade talks

Monday 09 September 2019

Stock take

“A house divided against itself cannot stand.” Abraham Lincoln may never have uttered these wise words if he had had a sibling in higher politics. Last week’s fraternal rift between Prime Minister Boris Johnson and his brother, Jo Johnson, is no more than the latest in a line of divisions that began to dominate domestic politics in 2016.

The divisions in the Conservative Party have only grown wider during the Prime Minister’s less-than-two-month tenure, while the last week alone has seen the party lose its working majority as well as the expulsion of several heavyweight MPs. What will happen next, nobody knows. Will there be a general election? Will Brexit go ahead, or will it be stopped? Could there be a vote of no confidence, potentially called by the Prime Minister himself? Amid such uncertainties, we couldn’t speculate if we wanted to, though a general election may well be the only solution to the current impasse.

Mark Dowding of BlueBay said: “Currently, many assume that the Tories would be overwhelming favourites to win such a vote. However, we are sceptical as to how many seats the Tories can win in traditional Labour seats in the North. Meanwhile, Labour’s election chances could further be enhanced were Jeremy Corbyn to agree to step aside at the upcoming Labour Party Conference. It is quite possible we will see another UK Prime Minister in 2019, putting Boris at risk of being the only one to never win a single vote in Parliament.”

Boris weakens while Sterling strengthens

While the Prime Minister’s hold weakens, Sterling, acting as a counterweight, has strengthened thanks to rising expectations that a no-deal Brexit will be averted. The opposite is true for the FTSE 100, however, because of the weight of foreign earnings generated by FTSE 100 companies. It’s important to remember though that the UK accounts for just 2.25% of global GDP, and that the UK’s crisis is not the world’s crisis. Overall, Brexit is likely to continue to have short-term implications for Sterling investors.

Further to this point, equity investors on a global level lost interest in Brexit (seen as a British issue) a while ago, and instead are more heavily focused on global growth, company earnings, central bank policy, and the US-China trade war. As hoped by investors, central bank policies are softening, but this is in great part due to an apparent fall in momentum from global growth and company earnings.

Going back to Brexit for a moment, Azad Zangana, Senior European Economist at Schroders, had this to say: “It’s been pretty clear for some time that the Brexit uncertainty has hit investment hard, although we are not expecting a no-deal Brexit but some kind of deal in the first or second quarter. If you have to be in Sterling and are worried about a no-deal Brexit, you’d rather be in the FTSE 100. But if there’s not going to be a no-deal Brexit then the FTSE 250 is a better option; although investing overseas is arguably even better in terms of your overall portfolio.”

Sticking points for US-China relations

Speaking globally then, last week saw Oxford Economics, Bank of America Merrill Lynch and Bloomberg Economics all downgrade their China growth forecasts to below 6% – China accounts for almost 10% of global GDP. A growth of 6% is what the Chinese President needs to meet his 2020 target and on Friday, The People’s Bank of China delivered the stimulus he needed by cutting the cash reserve ratio banks must hold to just 0.5% (worth $126 billion of liquidity, it claimed) – its lowest since 2007.

Elsewhere, a plunge in industrial orders in Germany, the addition of fewer new jobs than expected in the US, slowing growth in India and Australia, a technical earnings recession in the US (meaning a fall in profits for two straight quarters) and a decline in US business confidence all added further worries.

Above it all, in terms of market influences, however, were developments in the US-China trade war. The S&P 500, Shanghai Composite and Japan’s TOPIX all benefitted from plans being announced for senior Chinese officials to take part in a new round of talks in Washington. Last week as well, China signed an oil and trade deal with Iran and the troubles in Hong Kong continue to divide opinion, meaning it’s not just trade that’s a sticking point for US-China relations.

But it’s not all bad – one market worry has begun to subside thanks to Italy’s new, more EU-friendly government proving more attractive to bond investors. The yield on Italy’s 10-year debt has also dropped below 1% for the first time in history, after Matteo Salvini’s (Northern) League left the government.

“For Italy it’s very important to have this closer relationship with Brussels. Creating confrontation only means the European Commission and Northern European countries are less willing to help Italy out and give it leeway when it comes to budget rules,” said Nick Andrews of Gavekal Research. “Also, lower yields mean lower interest rates can be passed onto the broader economy, so that should ease financial pressures in the economy. With Salvini out of government, a major risk has been removed.”

Wealth Check

Unsurprisingly, the prolonged political uncertainty in the UK has meant that few are willing to take risks – particularly with further uncertainties on the horizon. Therefore, the trend has been for business owners to look to extract cash instead of seeking out new business or trialling new lines of business.

It is a sensitive time for this approach, however – Entrepreneur’s Relief, which those looking to extract cash have usually sought to benefit from, may be shaved down or removed altogether according to recent comments from politicians.

Forward planning as soon as possible is therefore the best course of action for any business owner thinking about exit strategies or large cash releases. It’s also advisable to brush up on the nuances of how the HMRC defines whether your business qualifies for the allowance.

While it’s harder than ever to predict where British politics will head in the coming days, let alone weeks and months, careful planning should see business owners ready for changes that may come.

In The Picture

While financial education has been on the national curriculum since 2014, the UK is still below average when it comes to teaching children about managing money according to the latest OECD rankings. In the video below, we introduce how financial education works and why it matters.

The Last Word

“Minister Jo Johnson quits to spend less time with family”

how the BBC reported Jo Johnson’s decision to step down.

The information contained is correct as at the date of the article.

BlueBay and Schroders are fund managers for St. James’s Place.

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The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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