The Brexit process has begun
The UK formally left the European Union (EU) at 11pm on 31 January, after 47 years’ membership. It’s still too soon to tell what the full impact of Brexit will be on the economy and markets. This is partly because the UK and EU are only just starting negotiations on many complex areas such as fishing, finance, trade and security.
By the end of the year, there’s likely to be some sort of agreement, which may give us a better idea how far apart or close the future relationship will be, and what impact this will have on the various sectors and industries. In turn, this should give us a better understanding what it will mean for the economy and markets.
What’s important to remember is that Brexit is a process, not a single event. And there are other important issues facing both the UK and EU, including immigration, climate change and new technology, which will also affect the economy and markets either positively or negatively.
Nevertheless, at Aberdeen Standard Investments we’re quite optimistic about the prospect for UK businesses, particularly small to medium-sized companies. The Budget in March should give us a clearer view about the government’s business strategy, and that will be important for many sectors and companies.
Interest rates remain on hold
There had been speculation that the Bank of England would cut its base rate from the current 0.75% level to help stimulate economic growth. In the end that didn’t happen in January, with outgoing Bank of England Governor Mark Carney saying that there were early signs of improvements in the UK and global economies.
However, cuts later in the year are still possible, for example if the novel coronavirus causes a major hit to global growth. In particular we’re watching to see if the Bank of England will start quantitative easing again – in fact we see any decision to do this as more important than interest rate cuts.
In addition, there have been signals that the government will increase public spending and cut taxes. Both of these could increase business and consumer spending, and in turn potentially boost the economy. The Budget on 11 March will be well worth watching.
Not much light at the end of the tunnel for the UK high street
2019 saw the collapse of more major high street businesses and restaurant chains, including Mothercare and Jamie Oliver’s UK restaurant group. It isn’t only the UK retail sector which is affected though – the rise of e-commerce has led to many traditional retail businesses struggling across the world.
We don’t see 2020 sparking a major turnaround for much of the UK high street. The latest survey from the Confederation of British Industry, the UK’s main business organisation, showed no improvement in retail sales compared to a year ago. So further bankruptcies are likely, and landlords may also have to renegotiate rents with their tenants. There are always winners from such structural changes though, so fund managers and investors could look for opportunities in this volatile sector.
The global economy still faces headwinds
Of course the novel coronavirus has been hitting the headlines recently, and cases have now been reported in many countries outside China. We believe the epidemic will eventually be contained, with a vaccine expected by the summer. But there’s still likely to be a major economic impact on China, with spending on things like luxury goods, travel and tourism curtailed.
As a result, many companies are under pressure as China is such a major importer and exporter. But history suggests that as long as the situation is contained globally, there will eventually be buying opportunities. Beaten-down stocks and markets, such as in commodity and consumer-related sectors, are likely candidates.
Elsewhere, tensions in the Middle East look set to continue, President Trump is threatening to put tariffs on European car exports to the US and, of course, we could see further problems from climate change, as illustrated by the devastating fires in Australia.
Events like these can spark volatile financial markets. But it’s important to look beyond the noise and at the key questions that will signpost the longer term outlook. Is the global economy going to avoid recession? Is economic policy supporting growth? Can companies continue to grow profits? We expect the answers to these to remain ‘yes’, in which case at Aberdeen Standard Investments we’ll continue to have more emphasis on riskier investments in our portfolios.
And finally, it’s goodbye
With regret, I must tell you that this is my final article. I’m retiring from Aberdeen Standard Investments after 19 years as chief investment strategist. It has been a most enjoyable time, and I do hope you’ve found some of my views and analysis useful.
Next month you’ll hear from my expert colleague, Richard Dunbar. Richard is Head of Multi-Asset Research at Aberdeen Standard Investments, and his years of experience will help guide you through the complexities of investing in the 2020s. Good luck!
The information in this article should not be regarded as financial advice. Please remember that the value of investments 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 February 2020.