The Multi-Asset Process

November 2019 Market Review

We often talk about the importance of blocking out the noise when it comes to investing, and with the UK election cycle in full swing and the US gearing up for 2020, we are at maximum decibel level.

Encapsulating just how much sentiment can move markets, we saw BT shares fall 4% mid-month on the news that Labour would deliver free broadband to every UK home free of charge by 2030. To be clear, this was on the back of an announcement a month before the election by a party still comfortably behind in the polls. And even if Labour does find a way to put Jeremy Corbyn into Downing Street, there is no guarantee they will still be in power by 2030.

I have been seeing clients around the country over the month and, understandably, many are keen to know our view on the election. We have seen both parties launch their manifestos and the common theme is an end to austerity and higher government spending. Brexit obviously remains the key battleground: Boris Johnson is proclaiming there will be no extension to the transition period beyond the end of 2020 but it is far from clear what kind of trade deal can be negotiated with the EU in only 12 months. Corbyn, meanwhile, has suggested he could sort the situation within six months. That would require asking the EU for a fourth extension, despite the bloc saying it will not renegotiate again, and giving the country a choice between leaving with a sensible deal or remaining in the EU.

Unfortunately, our crystal ball in terms of potential election result is no clearer than anyone else’s: markets clearly see Corbyn as unfriendly to business and a risk to the economy, with concerns focused on Labour’s planned tax hikes, extensive nationalisation plans, and requirements for worker/consumer representation on company boards and UK-listed companies to hand over 10% of their equity to workers.

As we saw in the immediate aftermath of the Brexit vote, markets and sterling would likely be very volatile in the early days after any Labour victory. Beyond that however, it is impossible to know how things would play out and we see little value in speculating at this stage.

A Conservative majority would show Johnson’s “Get Brexit Done” mantra chimes with the country and given such a mandate, we would expect to see the Prime Minister act swiftly. This would remove near-term uncertainty and should give a much-needed boost to both corporate and consumer confidence. Any relief rally may prove short lived however as the PM and his cabinet start to negotiate a trade agreement, with the possibility of a hard Brexit still among the options.

A hung parliament, meanwhile, would show a nation still divided on the Brexit question and further uncertainty around what kind of coalition ultimately emerges and the compromises that would involve. In the near term, again, we would expect to see a reversal of recent strength in the pound and, similar to post-Referendum, favouring of companies where earnings are more export rather than domestic-led in revenues.

What we can say in the face of all this, and have stressed since a Brexit vote that seems so long ago now, is that we remain long-term patient investors and history clearly shows that attempting to time moves in and out of markets, either to capture opportunity or avoid risk, is rarely a positive strategy. It is also worth reiterating we are very much global investors: the election and Brexit continue to dominate newsflow but the UK only makes up 6.6% of the global stock market and 3.4% of the global economy so there are far larger forces at play when it comes to our portfolios.

Across the Atlantic, impeachment drama is picking up and as ever, another month of trade tedium has ticked by. A piece on CNN compared the whole trade war situation to Groundhog Day, with every day seemingly running as follows: the Trump administration expresses optimism and stocks go up, reports come out that the sides are far apart and stocks wobble, China says a meeting is happening and stocks go up, Trump says China wants a deal more than he does and stocks go down.

Another $156 billion of tariffs on Chinese-made consumer goods are scheduled to come into force on 15 December and it looks uncertain whether we ultimately see a deal done this year.

Trump has offered a couple of olive branches to the Chinese, delaying a round of tariffs in autumn so President Xi Jinping could preside over the 70th anniversary celebrations of communism and cancelling October tariffs on the announcement of a so-called ‘Phase One deal’. But the difficulty in getting even a narrow deal through shows the underlying tension in the relationship, which is only made more difficult by pro-democracy protests in Hong Kong.

This situation took centre stage late in the month as Trump signed laws into legislation backing pro-democracy protesters, which Beijing condemned as full of prejudice and arrogance. In the kind of incendiary back and forth rhetoric that has characterised this trade debate, China spoke about the ‘sinister intentions and hegemonic nature of the US’ and said it would retaliate with firm countermeasures.

As we have become used to in recent years, this ongoing uncertainty was unable to put a brake on stock market performance, with the S&P 500 again posting a series of all-time highs throughout the month.

Meanwhile, the latest fund manager survey from Bank of America Merrill Lynch show a considerable shift out of cash and back into equities, spurred by what the bank called fear of missing out. Again, this appears to have come out of recession fears abating to some extent, so an absence of bad news as opposed to anything more positive.

The allocation to global equities climbed 20 percentage points month on month to a net 21% overweight, the highest level in a year – but to repeat, attempting to move in and out of markets, whether down to FOMO or anything else, has rarely been a sensible approach for generating long-term wealth.

For a comprehensive list of common financial words and terms, see our glossary here.

Key Risks & Disclaimer

Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

This content should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust.

Tuesday, December 10, 2019, 12:18 PM