Written by Mark Newman
Wednesday saw the Conservative party vote in favour of confidence in our Prime Minister Theresa May (even if the low margin of victory damages her credibility). Earlier in the day she had sought to cast her survival as being potentially critical in seeing through Brexit as she attempted to shore up wavering support, eventually winning the backing of 200 of her colleagues with 117 opposed. Whether this matters, is another question. It was already clear that her Withdrawal Agreement could not make it past parliament, and her position is in some way strengthened now that she doesn’t have to face another leadership election for a further twelve months.
However, we need to remember that Brexit opinions had already divided the nation back in June 2016, and since then political parties, business owners, families and the entire country continues to (and I believe always will) remain divided on this issue.
As many in markets are speculating, this leaves the path open for a softer Brexit, with some suggesting that parliamentary votes should be held on all the different options to try to chart a way forward. A soft Brexit is beneficial for the UK economy and domestic risk assets like UK banking shares and housebuilders, but it may be some time before markets are prepared to reflect this.
We see scope for further rate rises in 2019 in the event of a favourable outcome in the Brexit process, be this a Withdrawal Agreement being passed or a second referendum leading to ‘no Brexit’. Conversely, we see scope for rate cuts and more quantitative easing in the event of a no-deal scenario playing out, albeit it will be difficult for the Bank of England to loosen monetary policy further if sterling is under pressure, as a result of the adverse implications for consumption (via higher inflation and lower real wage growth).
As you are aware, we fundamentally believe in active portfolio strategies. Discretionary portfolios are naturally tailored to the individual circumstances of each of our clients. However, discretionary managers do have a broad house view about the market implications for Brexit which is generally reflected across the mandated portfolios.
Some have low overall exposure to the domestic UK economy, partly because quoted companies have significant overseas operations and partly because they have deliberately tilted their equity allocation to international markets. Whatever the outcome of the parliamentary vote there will remain for some time significant uncertainty around the path of future EU-UK relations, particularly when it comes to the trading relationship and issues around the Irish border.
Internationally focused UK companies, with earnings denominated in a currency like US dollars, can expect to benefit from a weaker pound. Their overseas revenue exposure effectively gives them some protection against a bad Brexit deal.
Some portfolios may also have an allocation to US Treasuries, as well as a small allocation to gold. US Treasuries are naturally defensive assets and provide a source of non-sterling denominated cash for investment. Gold exposure helps to diversify defensive allocations, and we saw gold perform well during the recent market volatility in October.
Whilst we expect more episodes of market volatility, we look forward to the country getting on track with plans to bring our economy back to stability following the important announcement on the leadership of our country. We retain our preference for active managed portfolios, but the long-term financial objectives of our client remain at the very forefront of our continued decision-making process.