Market review: Brexit uncertainty lingers, Europe flounders and US tightens oil sanctions

Andrew Milligan

With the UK retail sector continuing to struggle, Brexit uncertainty continuing and Europe remaining in the doldrums, what does all this mean for investors?

Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments, looks at the future of the UK high street and considers what effect Brexit uncertainty is having on UK interest rates. He also considers if tech companies can continue to perform well during the rest of 2019 and how markets are responding to political threats such as the US sanctions on Iranian oil.

Tough times for the UK high street

The UK high street continues to suffer as consumer behaviour changes. However, the rise of online shopping and online spending hasn’t only affected the high street and shopping centres in the UK – most other major world economies have been adversely affected by these trends too.

According to some estimates, internet sales now account for 20% of overall retail spending in the UK. All this is causing major problems for well-known high street names such as Debenhams, while firms such as Toys R Us and Maplin have already shut down. Despite this, it’s worth noting that total consumer spending is growing steadily, supported by high employment and steady wages growth. However, we’re seeing a change in habits, with spending on leisure activities on the rise, while clothing and consumer goods aren’t doing so well.

At Aberdeen Standard Investments, we see only limited prospects for the UK commercial property market in the next few years. In fact, commercial property isn’t an area we’re very positive about in many other parts of the world either. Location, location, location really matters: some exceptions to this are well-located food and convenience outlets that are close to transport hubs in major cities.

Politics influencing interest-rate decisions

Economic factors may suggest that it’s time for the Bank of England (BoE) to raise interest rates, but politics tells a different story. For now, it’s battling against the uncertainty of Brexit negotiations and the slow but inevitable rise in wages as employment grows.

This improvement in employment and wages has supported household incomes, which in turn has encouraged household spending. But while politicians continue to debate and procrastinate over Brexit, many businesses have held back on capital spending – so the overall economy is flatlining.

Faced with this set of circumstances, we expect the BoE to keep interest rates on hold until a clear way forward on Brexit has been agreed. We’ll hear more on its latest thinking in the May Inflation Report.

US gets tough on Iranian oil

Political decisions can affect many markets – oil being a prime example. The US Secretary of State, Mike Pompeo, has announced that the US won’t issue any more exemptions to countries importing Iranian crude oil. This means that eight countries currently exempt from US sanctions if they buy oil from Iran will face penalties if they continue to do so after 2 May.

Investors are naturally keen on understanding the implications for markets. However, the situation is quite complicated – which is often the way when the White House intervenes.

The oil market was already under some pressure, due to lower supply from countries such as Venezuela, before the Trump administration made its decision. There’s uncertainty too about how importers of Iranian oil, such as China, will respond, whether Iran can find new ways of getting round the sanctions and whether Saudi Arabia keeps to its agreement with the US to expand supply. President Trump certainly won’t want to see high gasoline costs as Americans start their summer road trips.

With oil prices currently fluctuating between $70 and $75 a barrel, there still appears to be room for further rises – traders are placing their bets accordingly. However, as and when the price reaches $80-90 a barrel, we expect shale producers in the US to expand output as more fields become profitable. This may explain why the share prices of oil companies are lagging behind even though the cost of oil has risen.

Uncertain outlook for tech stocks

So far this year, the US tech-heavy Nasdaq Index is up more than 20% as better-than-expected earnings reports eased concerns about the impact of slower economic growth. But when looking at how tech companies have performed, it’s very important to differentiate between the many different types of businesses. For example, Alphabet/Google has returned to its July 2018 highs, and Apple is approaching its October 2018 highs. But Facebook, for example, has performed far less well as it faces the prospect of stricter regulations.

There’s a lot of uncertainty in the outlook for some tech companies, with share prices of firms such as Twitter significantly affected by reports of lower or higher subscriber numbers. These stories are in addition to the weakness of other types of tech companies, for example those involved in smartphones where growth rates have definitely rolled over.

What do we like? In most countries, we see software companies, such as Microsoft, as well as select internet companies as the most attractive long-term investments. Stock selection remains key!

Europe’s crisis of confidence

The manufacturing sector recession is continuing in Europe, especially in countries such as Germany and Italy, although overall consumer spending is holding up and preventing a recession across the whole economy.

Some key sectors such as cars remain very weak, and the threat of a trade war between the US and Europe, plus slow progress on Brexit negotiations, haven’t helped business sentiment.

On the plus side, the European Central Bank (ECB) is clearly hoping that the turnaround we’re beginning to see in China will feed through into global trade and European exports by the summer. And high levels of employment and low interest rates are supporting key areas such as housing. All in all, the ECB looks to be in a ‘wait and see’ mode – as do global investors. We remain neutral on European equities in our portfolios – it looks to be a stock picker’s market, finding attractively priced stocks with a global exposure.


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 May 2019.