25 Mar 2019
As it becomes increasingly difficult to add much value to the interminable Brexit situation (with no end in sight); the US is also causing investors cause for concern.
This article forms part of the UK's 'Weekly Digest' series.
Get Focus insights straight to your inbox
It currently sees very little to choose between them. A general election with Article 50 extension (30%) is the current favourite, and when combined with the chances of another referendum, also with A50 extension, (15%) and an unspecified extension to Article 50 (20%), it means that the odds suggest there so no end in sight.
Brexiternity? And economists wonder why there’s no productivity growth!
So far we have resisted the temptation to recommend shifting more exposure towards the UK, partially because it’s not entirely clear what the source of funds would be on a risk-neutral basis. After all, one could make similar claims of value for Europe (ex-UK), Japan and Emerging Markets.
The US remains superficially the most expensive market, but it is better valued than it was and still home to the best-in-class companies generating the highest returns in many industries. And so we wait for more certainty on the political front. This might entail having to invest at a higher valuation, but, in this case, we are willing “to pay more to know more”.
But the initial trigger for last week’s market wobble seemed to be the latest statement from the US central bank, in which it downgraded growth and inflation forecasts for this year and next. It also removed its expectation of any interest rate rise this year, while also bringing forward the date at which it will stop shrinking its balance sheet.
At other times this might all have counted as good news, and, in fact, the knee-jerk reaction of markets was positive, warming to the idea of lower interest rates and a reduced discount rate. However, more sober reflection led to the view that the Fed’s members could see something much scarier around the corner. Further fuel was thrown on the fire in the form of weak purchasing manager survey data in Europe, and a nagging fear that the US and China might not find it easy to reach a trade agreement.
No doubt higher indebtedness makes the economy more sensitive to higher interest ratesThe bear market and recession of the early noughties was not called the “Tech Bust” for nothing. There had been a massive build-out of capital projects which were never going to generate a return sufficiently large to service the debt, and so there followed an equally impressive capex recession.
The financial crisis centred on sub-prime mortgage debt, another area that remains benign, thanks to the scars of that era as well as more stringent regulation. Even the last US-inspired recession alert in 2016 was largely built on the travails of just one sector, Energy, which had been sinking capital into oil rigs and wells at a Hurculean rate just before a huge collapse in the oil price.
It still seems improbable that what are, admittedly, pockets of weakness in the US economy will coalesce into something more far-reaching, especially now that interest rates are on hold. Even so, the perceived proximity of the end of the cycle means that markets are likely to remain more volatile as fears ebb and flow with every scrap of economic data.
About the author
John is Head of Investment Strategy for Investec Wealth & Investment UK, is a member of the Global Investment Strategy Group, and is Chair of the Investec & Investment UK Asset Allocation Committee. John graduated from Exeter University in Modern Languages in 1984. He spent 27 years as an institutional stockbroker with Merrill Lynch and Lehman Brothers, before moving to investment management in 2011 and joining Investec in 2013. John is an Everton FC supporter.