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Investment Line: Market Update - November 2018

Investment Line: Market Update - November 2018

Investment Line is a regular investment bulletin produced by Mattioli Woods plc. The communication provides an update on funds, highlights some of the areas we are focusing on, and shares our thoughts on the issues of the day.

BREXIT

Though Theresa May’s chances of remaining as Prime Minister appear to have improved in the last week, the uncertainties over Brexit continue to weigh heavily on UK investors’ minds. It appears the UK and EU are about to sign a declaration affirming their “deep relationship” as soon as this weekend, yet Mrs May still has to get the Withdrawal Agreement through Parliament. She will almost certainly be the one orchestrating this attempt as any leadership challenge looks unlikely to succeed in deposing her, for now, yet, her problems are very real. Having seemingly seen the relationship with the DUP break down, Mrs May is going to have rely on the support/kindness of those on the opposition benches to get this deal done. The arithmetic doesn’t at first sight appear to present a case for her succeeding; realpolitik might yet save the day for her.

While Conservative hard-line leavers may hate the deal, they will want to avoid the collapse of the Government, which could follow their voting against it. On the other hand, opposition remainers are keen to damage the Government, but are terrified a “no deal” could result. The prevailing hope is common sense will reign, and a deal will be done, while some envisage a successful “renegotiation” with the EU – however, it is unclear how this happens. Indeed, there are many stating, with apparent certainty, that x or y can still be done when, in fact, we are out of time to see much happen at all. This uncertainty means outlier events such as a second referendum and/or a General Election also have to be factored into decision making, with both positive and negative market outcomes possible under these scenarios. With no visibility, and no prospect of certainty until the vote in the House of Commons, it’s a cocktail for more UK asset/sterling volatility. The initial, poor reception for the Withdrawal Agreement impacted those areas most dependent on domestic economic strength, with banks and housebuilders posting significant share price falls. Interestingly, gilts performed well as investors seemed to bet that a rate rise was less likely against an uncertain political and economic backdrop, but the possibility of inflation from a weakened sterling is surely a material risk. Overseas earners, especially larger cap names, fared better than small ones. All of these market moves would be expected to be seen in reverse if a positive outcome resulted from the ongoing negotiations and exchanges.

We entered this maelstrom already low in our UK equity allocations (though with substantial commercial property positions) and although there may be an opportunity presented by depressed valuations for domestically-focused companies, the level of uncertainty means we cannot currently justify increasing exposure. From a global perspective, Brexit barely registers when it comes to the risks financial markets face – a slowdown in global growth, monetary policy tightening, China and Italy would be nearer the top of that list – but for UK investors the potential impact on sterling and the economy from a “no deal” outcome is very real. True, a market-friendly or at least a benign outcome could materialise in the coming weeks, but the argument for adding to UK exposure still seems based more on hope rather than a convincing argument. Given the abrupt change we have seen in investor sentiment, this is no time to be taking unnecessary risks.


Investment Line is written and edited by members of the Mattioli Woods Group investment committee and is for information purposes. It is not intended to be an invitation to buy, or act upon the comments made, and all/any investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances. The value of investments and the income from them can go down as well as up, and you may not get back the amount invested. Past performance is not a guide to future returns.

Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.