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Market review: Brexit extension, volatility to continue, but some positive signs

Andrew Milligan | November 12, 2019

Time to read: 5 minutes

Andrew Milligan,

In his regular review of markets, Aberdeen Standard Investments’ Andrew Milligan considers the impact of the Brexit extension and UK election announcement. And he looks at the longer-term outlook for the global economy and markets.

Brexit extension and election announcement signal continued uncertainty

The European Union’s agreement to extend the date at which the UK will leave coincided with the news that a general election will be held just before Christmas. Although this makes a hard Brexit less likely, financial markets now have to contend with uncertainty about the election result. Many opinion polls are predicting a Conservative majority, but they have been known to be wrong.

There have been signs of interest by overseas investors in UK companies and assets. But we expect that on the whole they’ll hold off until the election result is clearer – whether that’s a majority Conservative government that can push a Brexit Bill through Parliament, or a hung Parliament that’s likely to signal a continuation of political divisions. As ever, the pound-dollar and pound-euro exchange rates give strong signals about investor confidence in the UK.

Volatile markets are here to stay

Volatility is something we have to learn to live with as investors. Compared with previous decades, there are far more political tensions globally, while factors like quantitative easing, the growth in passive investing styles, and very low (in some cases negative) interest rates are all having a significant impact on how financial markets trade, especially around key times such as year end.

I suggest that investors need to learn to love volatility – after all one of the best times recently to buy global equities and other higher-risk assets was in December last year, when poor trade news led to many investors selling and prices falling sharply.

A key point to remember in volatile markets is the importance of having a diversified range of investments, for example by investing in a multi-asset fund, and also by taking a long-term view. For more on this read Brexit, market volatility and your investments or this market volatility Q&A.

The only financial asset which won’t be affected by volatility is cash. But the drawback to holding it is that it offers very low returns, sometimes negative after adjusting for inflation. To get higher returns, you have to be prepared to take on more risk. Find out more about this in Cash is king – or is it?

Continued low interest rates carry some risks

Low and even negative interest rates have been with us for a decade now. Certainly many consumers and businesses have benefited from low borrowing rates during this time. But there are drawbacks to this.

A number of influential organisations, such as the International Monetary Fund and the Bank for International Settlements, as well as some countries’ central banks, have been warning of the risks of continued low and negative interest rates.

For example, it’s difficult for banks to make profits because of the narrow spread (or gap) between the rate they’re lending at and the rate they offer to savers. Low and negative interest rates also make it more difficult for households to save, so they delay big purchases. This in turn has a negative impact on sectors which rely on consumer spending.

Another problem is that low interest rates can provide support for weak businesses to stay afloat. While this may seem positive, it actually stops people, money and ideas going into new ventures, which can have a negative impact on economic growth.

And because it’s easy for governments to finance public sector debt due to low borrowing costs, they’re putting off hard decisions on things like public spending, taxes and regulations. The debate has begun about governments needing to be more proactive to encourage economic growth. But, until there’s some form of crisis, it looks like they’ll mainly rely on central banks to help do this.

Some positive signs for the global economy and markets

Despite some negativity around global politics, there are signs of relatively positive economic growth as we reach the end of the year. The news from talks between the US and China suggests that later in November the two countries will agree a truce on trade matters. In return for China importing more US agricultural goods, the US might agree to halt tariff increases.

This, together with more stable indications from some key business surveys and signs that company profits remain relatively buoyant, has helped global equity markets start to climb. We don’t expect a rampant bull market. But we believe that the removal of some bad news may encourage cautious investors to start to think about previously unloved markets such as Europe and the UK, as well as sectors and companies which tend not to do so well when the economy is struggling.

At Aberdeen Standard Investments, we’re currently positive about equity markets such as the US, Japan and selected emerging markets, as well as certain high-yield corporate and emerging market bond markets.

That said, we need to be aware of the possibility of a policy mistake leading to recession in the next year or two, especially if politicians make errors. In that scenario, investments which are less affected by volatile markets include ‘safer’ corporate and government bond markets, some property markets, US equities, and sectors like pharmaceuticals and utilities. When creating an investment portfolio, it’s ever more important to think about what you’re investing for and for how long.

 

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 November 2019.

Andrew Milligan

Head of Global Strategy

Andrew advises the CEO and the senior fund management team with economic and market analysis. He is a member of the Global Investment Group forming the House View. The Strategy team writes the Global Series of research publications for cli […]

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Andrew Milligan

Head of Global Strategy

Andrew advises the CEO and the senior fund management team with economic and market analysis. He is a member of the Global Investment Group forming the House View. The Strategy team writes the Global Series of research publications for cli […]

Read Andrew's features
Andrew Milligan,

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