Market Commentary – March 2019

13th March 2019

The Author: David Cooper
Financial strategist, investment adviser and Sales Director for United Advisers

Brexit. To be, or not to be?…

That is, indeed, the question that has dominated markets this month.

As we’ve seen over the last few months with all the turmoil and political shenanigans spawned by the UK’s stumbling progress towards a somewhat ungraceful EU Exit. Trying to predict the eventual outcome of Brexit, and what the world will look like after March 29th is a little like trying to herd a scurry of feral squirrels!

As I write this I’m aware that it could, very quickly, be superseded by events that are moving ever faster as we near the Brexit finish line. Nevertheless, we feel it’s useful to reflect on what the world reacted to during the last month, how it responded, and how we think that affects investment strategies.

On the Brexit menu for February

This month has included:

  • Mrs May agreeing to a potential vote to delay Brexit if needed
  • Labour supporting a second referendum in certain specific circumstances
  • Cabinet members moved to restrict Mrs Mays’ manoeuvrability over a no-deal exit threat
  • Increased likelihood of a General Election, but decreased possibility of a subsequent labour government

During February, contrary to what you might believe if you followed some of the protracted discussions and grumblings taking place within the House of Commons and House of Lords, markets priced in a managed exit from the EU, rather than assuming a more chaotic no-deal exit or, as was often touted during the month as a possibility, the UK remaining in the EU.

February’s Brexit related events and the expected potential political fallout have been mostly responsible for a strengthening of sterling, jumping it to $1.33 against the dollar for the first time since July 2018.

In recent events

There was last night’s slightly ‘chummy’ display of Brexit comradery from Mrs May and Mr Junkers… touting the efficacy of all sorts of new and solid legal and binding paraphernalia around the Irish backstop that has been added to bolster the Brexit ‘deal.

We’ll have to wait and see what sort of effect that has on the situation and whether this final Hail Mary is, in fact, the spoonful of sugar needed to render the medicine palatable to Parliament, and make everything better.

How does this relate to our portfolios?

We design the core element of portfolios to avoid directional exposure to bonds, and any significant moves in sterling magnify the volatility of that exposure.

Sterling has undoubtedly been more volatile since the referendum, driven more by political events, which by their nature are harder to predict, than economic or interest rate developments.

Sterling-based bond market volatility levels have been more like that expected from equity markets. Core portfolio construction and the funds selected are designed to provide insulation from that increased volatility and so help to deliver a smoother investment journey, particularly for those investors focused on wealth preservation.

…and in other news

Both the US dollar and Chinese equities rallied, with China feeling close to agreeing on a trade deal with the US and seeing 2019 more positively, and rising confidence in the US that the Fed may choose not to raise rates this year.

In Europe, German spending reduced, while saving increased, reflecting increasing nervousness about decreasing exports, factory orders, and industrial production.