Market review – Brexit, trade and time for reflection

Andrew Milligan

Almost 10 years on from the collapse of Lehman Brothers, Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments, reveals some of the important lessons learned.

He also considers the outlook for the UK economy in the face of ongoing Brexit uncertainty, the latest interest rate rise and what continued trade wars could mean for global growth.

Brexit, the economy, and the pound

Given ongoing Brexit issues and shock ministerial resignations throughout the month, investors are once again questioning the outlook for the UK business cycle and the pound.

The truth is the outlook for the UK economy is easier to assess than the outlook for the currency. At Aberdeen Standard Investments, we expect the economy to continue in the slow lane, growing about 1.5% a year. Consumer spending will be supported by the improvement in employment and less pressure on real incomes. But on the other hand, uncertainty persists around the big ticket purchases and business investment due to the unknown implications of Brexit.

As far as the pound is concerned, politics and interest rates are the two main drivers. Global investors do pay attention to the news from Parliament, but they’re also concerned about how aggressively the UK, US and European central banks will each handle interest rates in 2018 and 2019. Overall, at Aberdeen Standard Investments, our portfolios are broadly neutral on sterling compared with other currency markets.

Interest rates rise – at last

It’s true that the Bank of England has deliberated for some time now but this rate rise comes as no surprise. The economy has done just about enough for the Bank of England to justify a hike but we shouldn’t get too excited about this being a sign of things to come.

It’s unlikely that the Bank of England will follow up with further rate rises in the next few months given the risks on the horizon, such as Brexit. The Bank is basing its assumptions on the UK having a smooth transition from the EU and that’s quite a big assumption at the moment. The other big uncertainty is the UK’s weak productivity – that will ultimately determine how fast the economy can grow without stoking inflation.

Are there more attractive opportunities outside of the UK?

At Aberdeen Standard Investments, we prefer other global stock markets to UK equities in our portfolios. This is partly because of Brexit uncertainty. It’s also partly due to the slow growth of the UK and European economies compared with the US and some global emerging markets. But much depends on the make-up of the market. Right now, the UK simply doesn’t have enough fast-growing companies in the faster-growing sectors. For example, this summer US firms are on course to grow profits by 20-25% a year. That’s more than double the rate expected for the UK or European and Japanese markets.

Could trade wars slow global growth?

The phrase ‘trade wars’ has been dominating the headlines in recent months and there are expectations that political mistakes could slow global growth. Yes, this could be true but the important thing is to ignore sensational headlines, take a rational view and understand the impacts.

A ‘trade war’ is certainly emotive use of language but what exactly does it mean? Is it the worrying tensions and trade friction we see today? Or is it policy errors which could lead to a material slowdown in the world economy – say if the auto sector gets badly hurt? Or thirdly, is it a complete breakdown of the global trading system leading to a recession as bad as 2000 or 2008?

Additionally we have to consider the first and second round effects from any trade news. There will be initial damage to businesses, for example those operating in steel and aluminium, soya beans and computer chips, but how does this affect business confidence in other areas? How do currencies respond and do policy makers try to offset some of the pain through stimulus packages?

Markets have a great deal to digest. On balance we think markets have priced in the current tensions but not a material slowdown, or worse. Politicians should be careful what they wish for.

The collapse of Lehman Brothers – where are we now?

As we approach the 10-year anniversary of the collapse of Lehman Brothers, it’s a time for reflection with many wanting to know – what lessons have we learned? The fact is there are so many lessons to consider. Here are just a few:

  • As ever, a diversified portfolio will probably do better in difficult times than a concentrated one
  • Don’t be too greedy – and remember that valuations are important over time
  • Don’t rely on models, whether risk or economic, they’re only a representation of the reality of the risks facing a business or a country
  • If governments have to do the unthinkable in order to prevent a depression, then they will do so. Negative interest rates is an obvious example
  • And finally, don’t assume that you can always sell what you’ve bought – a market place will have days when it’s easy to do so and days when it’s very difficult to do so.

The information in this article should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up and may be worth less than you paid in. Information is based on our understanding in August 2018.