Back in the day, the start of the school holidays led to an inevitable torpor in world financial markets, meaning any significant news flow was blown out of all proportions – which is why the history books show that August is one of the most volatile months for stock markets.
Summer 2017 is not going to be a quiet period for financial market watchers. Over in the US, Congress is musing eating into their summer holidays to discuss important issues around deficits and reform, meanwhile in Europe, President Macron is trying to work out how to make France more dynamic while Angela Merkel is eyeing up September’s Chancellorship elections to extend her decade long period in power.
And then of course there is Brexit. Earlier this week we were treated to the opening salvos of the second round of Brexit talks, an occurrence which made in some shape or form the front pages on nearly every mainstream newspaper in the UK, but was barely mentioned on the continent.
Yes, perhaps correctly the only country really obsessed with the ebb and flow of the Brexit debate is the UK. An obsession which is currently way too negative, which in the weird and wacky world of financial markets is an opportunity – but more on this later.
Let’s start with UK politics. Clearly Theresa May is in a political bind and will not be fighting the next election. However, political groups rarely shoot themselves in the foot twice in close proximity and with no clear candidate who could unify the Conservative party and keep the current cobbled majority together, the current Prime Minister will struggle on. Hardly ‘strong and stable’ leadership, but the rising acknowledgement of the importance of ‘interim transitional solutions’ between the UK and the continuing European Union is telling that a ‘soft Brexit’ could be on the cards.
Now this is good news for the UK economy. On two successive days earlier this week there were eye-catching headlines from leading accountants bemoaning the prospects for the UK growth rates over the next year or two. In short, the softer the Brexit the less these issues impact the economy over the rest of this decade.
However, the stock market is still in worry mode. The latest monthly edition of the world’s largest fund manager survey continues to show the UK scuttling at the bottom of a list of areas global investors can make with current allocations very lowly weighted versus recent history. And what are these fund managers most worried about? The political and economic backdrop which is not quite as bad as the headlines would tell you.
And the best way to see this is always via the currency markets. I remember attending a roundtable meeting of many experienced and well-regarded investment minds in London in early January where my prediction that the pound would rally back to 1.35 against the US dollar was politely consigned to a minority view. The pound’s mini-renaissance off the depressed post Brexit referendum levels and the dollar’s slump as President Trump’s plans have struggled to move into reality were not expected at the turn of the year. I think this trend will continue for the rest of the year.
So what does this mean for you? First, you do not need to panic buy your holiday currency in anticipation of a slumping pound during a long, struggling summer period for the UK political and economic scene. If anything – especially versus the dollar – the pound is going up.
Second, the fears around Brexit have impacted the UK stock market – especially the names that rely on more domestic consumer spending trends. Clearly the UK economy is not without problems with wage increases muted and savings rates low, but with the Bank of England set to keep interest rates lows and the uncertainty fuzz over Brexit and related matters set to lift a little, the glass will turn from being half empty to being half full again. So for investors – and your pension fund – it means opportunities. On the cusp of another quarterly earnings season, in this current individual stock friendly environment, the more domestic UK banking, retail, utility and construction plays – among others – should provide investment scope.
In short, don’t be fearful to tread where others fear as typically over a reasonable period of time you are rewarded. It may also be a good idea to give your probably pessimistic pension fund manager a nudge too.
Chris Bailey has over 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.
In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis. In December 2016 his Twitter account (@financial_orbit) was named as one of the ’50 accounts investors should follow in 2017’.
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