Please find below our Weekly Market Update for the week ending 7th December 2018.

The intention is to provide a brief insight into the latest dynamics and inform you of any changes occurring within the model portfolios.

Blue Sky Comment

Anyone got a crystal ball?

Clearly, nobody has… but rather than just throw our arms up in despair, it’s important that we, as advisers, are considering all the possible outcomes. Of course, you would expect nothing less! We are certainly working hard to understand the underlying dynamics and the potential impact on economies, companies and the markets.

The two main issues are Trade wars and Brexit.

Trade Wars

Going into the G20 meeting last weekend equity markets were sceptical that any positive developments would take place but responded well on learning of the delay in raising tariffs on specific goods. A proposed rise from 10% to 25% has benefited from a 90 day amnesty.

Equity markets rose strongly on the news, but having digested the sentiment, the situation didn’t look as encouraging as both sides postured and equity prices underwent a short, sharp shock.

As was reported in the FT, Beijing and Washington on Wednesday, sought to reassure shaken financial markets that their trade ceasefire could lead to a lasting peace, after a global sell-off exposed widespread investor fears that a G20 deal lacked any substantive agreement. In its first comments since the weekend truce between Xi Jinping, the Chinese president, and Donald Trump, his US counterpart, China’s government said it was “confident” a comprehensive agreement could be reached before a tariff freeze expires in three months.

We wait and see!

Brexit

Probably like everyone else, I’m sick and tired of hearing about it. If it wasn’t so important, I would refrain from listening, viewing and reading about anymore on Brexit.

This week, we are providing an insight from 7IM on their views as to what is likely to happen. Hopefully you’ll find this useful, even if you don’t agree with it!! I will say this is fairly consistent with the view we posted from JPMorgan a couple of weeks ago.

Blue Sky’s market comments in conjunction with our investment partners

Despite all the news, there is still no real clarity on the economic impact of Brexit. 7IM hold the view that a reasonable deal will be reached – it’s just too risky not to.

Whilst information on Brexit doesn’t always make for the most exciting read, it’s an issue that affects all of us and will inevitably lead to queries from clients as the media circus continues.

Terence Moll, 7IM’s Chief Strategist, has put together a brief summary on where we are and what he think’s about the whole thing:

A QUICK UPDATE ON THE BREXIT SHAMBLES

The Brexit show is rumbling on and on. We’d all be thoroughly bored by now if it wasn’t so vital to our future. 

The Prime Minister has put together a Withdrawal Agreement of nearly 600 pages, which the House of Commons will vote on during December. Right now, the maths doesn’t stack up. It’s hard to see where a majority could come from – Labour isn’t interested, the Democratic Unionist Party (DUP) won’t accept it, and plenty of Conservative MPs are shouting against the deal. But we predict that there’s a fair chance that a version of it will pass through Parliament before 29 March 2019.

Coming up with a deal that would please most people was impossible. But Theresa May has managed to get some control over the Brexit debate. Though the Withdrawal Agreement has been widely criticised, at least everybody is now talking about the same thing. After almost two and a half years, there is a clear deal to discuss and argue about. From now on, the battle will be fought on common ground.

For many MPs, this deal will come to be seen as good enough. Few politicians who’ve survived the last two years want to start all over again, whether Labour or Conservative. It’s easier to use the current deal as a platform to criticise May than it would be to re-negotiate with the EU. This is certainly true for Labour, and arguably for some of the Eurosceptic Conservatives. As Boris Johnson has shown, playing the game is far more difficult than being a spectator.

As for the challenges within the Conservative party, May’s opponents are walking a fine line. If a leadership challenge were to result in a general election, there’s a risk that Labour might win. That is such an unappealing prospect that most Conservative MPs are likely to support May – which might result in enough votes to pass the Withdrawal Agreement. Jacob Rees-Mogg may not like being a backbencher under May, but he certainly doesn’t want to be in opposition under a Labour government.

Of course, it’s important (and dispiriting) to note that even if this deal was passed, it would not draw a line under Brexit – it would just set the stage for talks about the future relationship with Europe. With tweaks and horse trading, the Withdrawal Agreement might just get over the line. Then, the real discussions would begin.

Our view is that some kind of Brexit arrangement will be reached that is not too silly: the economic costs otherwise could be high enough to terminate political careers. 

What does this mean for UK assets? Sterling remains inexpensive by historical standards and we would not be surprised if it claws back some lost ground next year. And, the FTSE Midcap is beginning to look intriguing… these companies are cheap and unloved by global standards, trading at a modest price/earnings ratio of around 12 and could provide a welcome surprise if the politicians get their act together. 

Terence Moll

Chief Strategist

…so there you are. In short, it’s not bad news for the UK investor as things stand. We’ll be sure to keep you updated with our thoughts as developments continue.

_{Sources: LGT Vestra and 7IM}