Market review – politics takes centre stage

Andrew Milligan

Politics continues to have a noticeable impact on financial markets. Brexit negotiations are zig-zagging towards a conclusion, causing the pound to remain volatile against other currencies, political uncertainty remains throughout Europe and the US-China trade talks are making slow progress. What does all this mean for investors?

Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments, explains how politics is only one factor affecting markets and suggests where investors can look for opportunities. He also looks at the US Federal Reserve’s (the Fed’s) latest announcement on interest rates and whether a recession is on the way.

Pound waxes and wanes as Brexit confusion continues

The pound has bobbed around as political confusion over Brexit deepens. But, at times like this, it’s important to pay more attention to economic signals and less to noise affecting short-term market movements, especially if this noise comes from political sources.

We’ve emphasised the point many times that the value of all the goods and services produced in the UK – known as gross domestic product (GDP) – makes up less than 2% of global GDP. Political decisions between those two heavyweights, US and China, about their trade negotiations will be far more important to the prospects for global and indeed UK financial markets.

Europe: barren or a land of investment opportunity?

Last year we saw international investors pull more than €50 billion out of European companies and, currently, investment in Europe is as low as it has been since the eurozone crisis which began in 2009.

It’s understandable that investors are wary given the many economic and political challenges Europe faces. But at Aberdeen Standard Investments, we believe there are still reasons why investors should consider investing in European companies.

Europe’s often seen as a complex market, which can actually be a great advantage if you know what you’re doing and can identify undervalued and overlooked opportunities. A great example is Italy. Here, we’ve found a number of fantastic investments in recent years, such as hearing aid retailer Amplifon. Despite all the economic and political challenges within the country, its business has grown strongly.

This is just one example – we believe that, for now, Europe remains a rich hunting ground for investment opportunities – partly because it is so unloved by many global investors.

Can performance overcome politics in emerging markets?

From new leadership in Brazil and Mexico to the upcoming general election in South Africa, politics is having a big impact on some of the more fragile emerging market economies. If an emerging market suffers from a trade deficit – which means it imports more goods and services than it exports – then it usually needs a regular stream of money coming in to fund this deficit. If political uncertainty is disrupting that flow then the value of the country’s currency is likely to fall sharply – as we’ve seen happen in Turkey recently.

However, there are other emerging market countries that investors can focus on as part of a diversified portfolio. They can either do this through their own research or make sure that the fund manager they choose to invest in has sensible investment approaches. At the time of writing (4 April), valuations for emerging market equities are generally better than for their developed market counterparts, for example.

The Fed surprises markets

The Fed met earlier in March and announced there would be no change to interest rates. They also released new forecasts showing there wouldn’t be any more interest rate rises this year – their previous forecast was for two more.

The implications can be complicated. On one hand, lower interest rates tends to make investing in stocks and shares more attractive. On the other hand, bond markets are suggesting weaker economic growth and a dip in company profits ahead.

This explains why some investors think there will eventually be a rate rise if economic growth falls and inflation rises. Others think there will be a cut, for example if US-China trade talks collapse. But which is correct?

At Aberdeen Standard Investments, we don’t think that the US will actually cut interest rates by the end of the year. Central banks are stimulating economies in many countries, which we think should eventually lead through to better economic growth.

For now we remain positive about equities and to a lesser extent real estate and higher yielding debt such as emerging markets or Australian bonds, in our multi-asset funds.

Tremors in the markets

Many commentators have argued that this business cycle must soon come to end and a recession will follow – and at the end of the month a small earthquake did shake the market as Japanese equities fell 3% in a day for example. Very low bond yields and poor economic data worried investors.

However, we don’t believe the technical signals from bonds necessarily indicate a recession is on the horizon. We think they should be seen as a warning shot across the bows. If some major policy errors are made, say by President Trump and President Xi failing to settle their trade talks, then business and investor confidence might slide sharply. As long as policy makers are sensible, disaster can be avoided.


The information in this article should not be regarded as financial advice. Please remember that the value of an investment can go down as well as up and may be worth less than was paid in. Information is based on Aberdeen Standard Investments’ understanding in April 2019.