Market review – Brexit, debt burdens and a bull run


Andrew Milligan

13th September 2018 at 1:40pm

Now that we’re in one of the longest recorded bull runs in US history, Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments, discusses what’s driving the US stock market and what’s causing emerging markets to blow hot and cold. He also takes a closer look at the UK stock market and considers the key challenges and opportunities facing UK investors in the lead up to Brexit completion.

Bull run in the US market breaks new records

North American markets continue to go from strength to strength and reached record highs in the month of August.

North American markets continue to go from strength to strength and reached record highs in the month of August.

But why is the US stock market performing so well?

At present, there are two main drivers of US share prices. The first is cyclical. The US economy was growing quite strongly into 2017, but this year it’s benefitted significantly from the tax cuts and spending increases proposed by President Trump. US companies have achieved profits growth of 17% more than this time last year – larger if the benefits of tax cuts are included. In a world of slow or slowing growth the US certainly stands out.

The second driver is technology. The tech and communications sectors make up 25-30% of the US stock market, which is similar to parts of Asia but much higher than Europe, the UK or Japan.

The growing importance of tech companies is very clear. Just a few weeks ago, Apple became the first firm to have a market capitalisation (the total market value of a company’s outstanding shares) of $1 trillion, shortly followed by Amazon, which has also hit the milestone. To put this in context, the market cap of the FTSE® 100 index in dollars is below $3 trillion.


US and Mexico reach a trade agreement

Markets were indeed cheered by the announcement that Mexico and the US had reached preliminary agreement on a revised trade treaty – the North American Free Trade Agreement (NAFTA). After weeks and months of negative press about possible trade wars, this was welcome news.

However, as they say, the proof of the pudding is in the eating. There were fewer details than investors would have liked to see, and the details that were revealed were more supportive of the US than the Mexican economy – it’s clear President Trump is trying to bring jobs back home.

Investors would be more reassured if the US managed to reach an agreement with Canada too, and tensions with China lessened. But, at the time of writing, that remains up in the air.


Emerging markets – in crisis or beginning to stabilise?

Firstly, it’s important to differentiate between the few high-profile emerging market countries that are in trouble, like Argentina and Turkey, and many other economies where the fundamentals, such as balance of payments, overseas debt and central bank policy-making, are much more solid.

That being said, in recent months we’ve seen the baby thrown out with the bath water as many investors have sold funds due to concerns about a small group of emerging markets with large debts or governments unable to push through difficult decisions. Argentina, Brazil, South Africa, Turkey and Venezuela are top of the list.

There’s now a view that the valuations of many emerging markets are rather more attractive and that’s why we’ve seen a little more stability in July and August. For this value to be released though, we’ll need to see a catalyst such as a major change of view by the US central bank, a stimulus package in China or a pull back by President Trump on trade war talk. These are the sorts of triggers to bear in mind.


What’s next for the UK stock market?

As we approach the autumn, US, European and even some emerging markets look poised to rally but sadly we can’t say the same for the UK.

As we approach the autumn, US, European and even some emerging markets look poised to rally but sadly we can’t say the same for the UK.

We expect the UK stock market to continue to lag behind the others. This is mainly due to uncertainty around the value of the pound and the outlook for Brexit and UK politics.

For now, at Aberdeen Standard Investments, we’re more optimistic about other global equity markets.


Brexit and the UK investor

Brexit has mattered and will continue to matter for the pound in our pocket and the profits of UK businesses. However, it’s vital to recognise that the UK’s relationship with the EU is not the be-all and end-all, as some newspaper columnists and politicians would have you believe.

There are much more significant risks and opportunities investors should be aware of. For example is there a US recession or a Chinese debt crisis on the horizon?

And, when it comes to opportunities, there are major developments in areas such as artificial intelligence, machine learning, robotics and autonomous vehicles. These have the capacity to be game changers. Small companies can grow very rapidly.

On top of that it’s important to recognise that the UK stock market contains many companies whose business models won’t be particularly affected by the outcome of Brexit.

Some of the biggest FTSE® 100 constituents are global mining or energy companies with very few operations in the UK or Europe. All in all, think carefully about what you’re investing in before buying UK shares.


The information in this article should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up and may be worth less than you paid in. Information is based on our understanding in September 2018.