Weekly Digest – INVESTEC

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Market Thoughts

With two months left on the Brexit clock, developments in Westminster this week will likely dominate domestic headlines. While Tuesday evening’s vote is not a full ‘meaningful’ ballot, with the next of those not scheduled until February, the dozen amendments on the table tomorrow could shape the ‘plan B’. Even if there is no time for all twelve amendments, there will almost certainly be a vote on Yvette Cooper’s proposal to extend article 50 if a deal is not agreed by 26th February and on another proposal that rules out a ‘no deal’ Brexit. The Sun is carrying a story that May has told parliament that she will not leave the EU without a deal, giving further momentum to sterling which has pushed through $1.32 against the dollar.

We believe that even the worst outcome of a chaotic “no-deal” exit at the end of March would have minimal impact on global growth.  Tilting our equity exposure to emphasise those companies with global profit streams remains the right strategy, in our view. The probability of sterling weakness in the event of “no deal” or the threat of a Labour government also presents us with potential gains from allocations to non-sterling high quality fixed income securities.

Our multi-asset portfolios have been consciously constructed to embody diversifying properties that, if the experience around the Brexit vote in 2016 is any guide, should substantially absorb the negative impact of local politics on their UK domestic exposure. However, we also note that UK-listed equities are now trading at a substantial valuation discount relative to history, which could in itself limit the downside risk while also providing potentially attractive future investment opportunities.

Away from the UK, it is a big week for policy and data from the US. The main event on Wednesday will be the Federal Reserve’s interest rate decision and subsequent press conference. Chairman Powell is widely expected to reiterate his more dovish commentary from December, indicating a ‘pause’ to rate increases, and may go even further with some commentary around slowing the pace of Quantitative Tightening. The market sees a diminishing chance of any further rate rises before June (c.25%).

With regards the US shutdown, a three week reopening as agreed by President Trump on Friday will allow some oxygen back into the system, and salaries into bank accounts. That said, it is highly unlikely that Trump will allow this to be the end of the debate over funding for the Mexican border. If congress cannot approve a budget which Trump considers satisfactory, then we should expect another shutdown.

There are all sorts of company reporting earnings this week and, whilst we do not wish to focus too much on short-term numbers, companies of particular interest include SMCP (today – reassuring results), Apple, LVMH, Microsoft, PayPal, Tesla, Thermo Fisher, Visa, Amazon, Celgene, Diageo, Shell, Unilever, Xylem and Roper Technologies.