Market review: Brexit continues to dominate the headlines

Andrew Milligan

Brexit continues to dominate the headlines in the UK. Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments, looks at what’s currently happening in the UK, and what this means for markets and investors. Looking elsewhere, he also considers the possibility of recessions in the US and Germany, and why the price of gold has risen so much recently.

Brexit uncertainty rumbles on

With the political situation surrounding Brexit moving dramatically by the day, it’s difficult to be certain about the possible outcome and the implications for financial markets. As we’ve highlighted for some time, we continue to look at the pound against the US dollar or the euro to get a good idea about how investors are feeling.

The movements we’ve seen in the pound are what we’d expect in response to the recent political uncertainty surrounding Brexit. For example, it wasn’t a surprise that the pound fell after Boris Johnson announced his plan to suspend Parliament, as that raised the probability of a hard or no-deal Brexit.

However, to put recent declines into perspective, the pound actually rose over the month of August. And money is flowing into UK assets, either because of the yields (income) they’re offering investors, such as UK government bonds (gilts), or because they’re attractive businesses for merger and acquisition purposes by foreign companies.

We’re remaining pretty neutral on all types of UK assets until the political picture is clearer.

The UK retail sector is suffering

According to the Confederation of British Industry (CBI), in August high-street sales fell at their fastest rate since 2008. This is a concern, and illustrates the pain many high-street retailers are feeling.

There’s no doubt that consumers are nervous about buying big-ticket items with so much uncertainty around Brexit. But we also need to look at the wider context – the long-term change in consumer behaviour towards more online purchases, plus spending more money on ‘experiences’ rather than ‘stuff’. And the weakness in high-street spending in the UK is no different to the experience of most other advanced economies.

The implications for investors are clear – find the winners and avoid the losers. In practice, we believe that means looking for the leaders in e-commerce, and those parts of the property market related to e-commerce, distribution and the entertainment industry rather than the now rather old-fashioned high street or shopping centre.

On a more positive note, record employment in the UK

Amid all the doom and gloom, it’s important to remember that the UK economy, like most major economies, is actually performing quite well. There’s been enough activity in the economy to drive unemployment down to historically low levels.

Of course, questions can and have been asked about the quality of some of these jobs, with an increase in short-term contracts and freelance work which offer workers much less protection. But what we need to remember is that many people are in work and seeing real growth in their incomes. That explains why, despite some nervousness around Brexit, consumer confidence is generally high.

The main risk we see ahead is some major shock to the labour market causing people to stop spending and save. We’re watching the monthly employment reports in all the big economies with great interest.

And the FTSE® All-Share Index has been rising this year

Despite Brexit uncertainty, and global issues such as the US-China trade wars and Middle East tensions, it’s worth noting that the total return from the FTSE® All-Share Index is approaching 10% since the start of this year (at the time of writing).

On top of share price moves, there’s the effect of dividend payments, dividend growth, share buy-backs and special dividends. Investors mustn’t rest on their laurels though. Looking ahead, it’s important to think about what events could hurt company cash flows and their ability to continue to make dividend and bond payments to investors.

Of course one issue is political uncertainty dampening business investment. Other factors include structural trends which are fundamentally changing how many industries operate: technology advances, increasing regulatory oversight and higher costs. All in all, we forecast that companies will generally see fairly modest profits growth into 2020. So our emphasis is on higher-quality companies with strong balance sheets.

Outside the UK, concerns about the US and German economies

There are mixed views about the outlook for the US economy. President Trump has been very vocal in his view that the US’s central bank – the Federal Reserve – should cut interest rates to support domestic activity. But minutes from recent Federal Reserve meetings show a wide difference of views among members about the outlook for the US economy, and how quickly interest rates need to be cut further.

This is why the Federal Reserve’s Chairman, Jerome Powell, has been at pains to say that any decision on further rate cuts will be based on what economic data is telling them. We expect two or three more cuts by next spring, which should be enough to stabilise the economy. But further improvements in the US economy will rely on no further policy mistakes by the White House and preferably some form of trade peace with China.

Closer to home, investors need to be aware of problems facing Europe – notably all the signs are that a modest recession is very likely in the German economy this year – the German central bank, the Bundesbank, has warned as much. The main cause is the pressure on the important manufacturing sector, partly because of the impact of global trade tensions and partly because of problems within the German auto industry.

The good news for Europe as a whole is that other countries, such as France and Spain, are holding up better. And even within Germany, some sectors, such as property, are very buoyant due to historically low interest rates. All in all, Europe remains a stock picker’s market until the European Central Bank turns its talk about potential interest rate cuts and quantitative easing into sufficient actions.

Gold is becoming a safe haven

The price of gold has risen sharply since June. This is very much an indication that some investors are looking for a safe haven for their money. Gold doesn’t perform well most of the time, partly because, unlike most other assets, it doesn’t give any sort of income to investors. It does though tend to do well where there are concerns about high rates of inflation or deflation (falling prices) or, as now, very low interest rates.

However, for the price of gold to go much higher than current levels, we’d probably need to see either a sharp fall in the value of the US dollar against other currencies or much larger cuts in interest rates than we’re currently anticipating.


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 September 2019.