Politics in frame as stocks lose Brexit fear

Politics in frame as stocks lose Brexit fear

The euro-sterling rate is very stable, settling around 86p and well down from the scary levels of a couple of weeks ago.

Finally, the crash-out scenario has been taken off the table and hopefully it will not return. We have another extension or ‘kick the can’ if you like, this time until January 31. Boris Johnson’s promise to exit by October 31 failed and led to a general election.

The UK election, itself, will be fascinating and most likely change the face of UK politics forever. It would be very foolish to try to predict the outcome as at this stage, anything is possible including Boris Johnson losing his seat.

But, for those with any interest in political affairs it is going to be a Game of Thrones.

For the markets, we try to anticipate the impact of who wins. Sterling has flatlined because we cannot make up our mind who that will be and what Brexit agenda will be pursued after the election.

We could have Boris Johnson’s approved deal or a new one. We could have a referendum — albeit a long odds scenario — which will require another extension past the January 31 date.

We need a clearer potential outcome to speculate in one direction or another.

What is clear is that when we were close to a potential crash out, the market did not have a meltdown. Yes, sterling weakened by about 5% but the stock market was stable. That tells me big market players are viewing the UK as a future investing opportunity and I agree.

We have recently had a strong interest in UK investment trusts, which offer varying types of diversified investment exposure to the UK economy. Traders and investors regard sterling as cheap and many assets in the UK are trading substantially below fair value.

So, despite the scare stories, the market views the UK as a buy regardless. That means that through this election process, we are unlikely to see meaningful negative market movement. However, if it became clear there was going to be a commons majority and a clear path to a Brexit resolution, the market will roar.

Unfortunately, the most likely scenario is a hung parliament and that will mean another Brexit extension. I said, when this started in 2016, that it might take six years to exit and God forbid I might be right.

Looking elsewhere, US stock markets are hitting all-time highs and foreign exchange volatility is at 70-year lows. Stock markets go up the escalator and down the lift. That means we have many years of appreciation and short spells of sell-offs. Which makes sense, as the value of assets — including companies — mainly appreciates over time.

So, it takes bad news for stock markets to fall, otherwise we rise and presently we do not have much bad news. Economies are slowing, yes, but that means accommodative central banks who cut rates and print money, which is very supportive for stocks.

We have very inflated stock prices — especially in the US — but unless we get a sustained bad news story or stories, we are not going to sell-off any time soon.

President Trump is fighting an election in the US next year, so he will have one eye firmly on the economy. I doubt he will do anything consciously to hurt it. Already he is rowing back from the tough stance on tariffs.

One small note; we may find the FAANG stocks on the political agenda next year. The US presidential election will be full of promises which cost money, of which there is little, as borrowing is so high. Threatening to tax the big tech stocks may well become an item, they are definitely on the menu. Given their high valuations, they could suffer a severe correction.

Foreign exchange levels are driven by economic outlook and interest rate differentials. That is why the US dollar has maintained such strength since 2014. Foreign exchange rates have now flatlined and that is due to the expectation that interest rates in the various economies are at the appropriate levels for well into 2020. Those expecting significant moves will be disappointed, the exception being a Brexit-driven move in sterling.

Peter Brown is founder of Baggot Investment Partners

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