Capability Brown

Investing in a year of political uncertainty

Our December Ask the Investment Team call focused on the investment outlook for 2017. In particular, the team considered the prospects for investing in Europe under the shadow of political uncertainties in the shape of Brexit and upcoming elections in France, Germany and Holland.

Topics covered included:

  • The state of the global economy
  • How changes in the UK’s relationship with the EU following Brexit might affect UK and European companies
  • The outlook for sterling and the euro
  • Investing in emerging markets
  • The effect of recent OPEC decisions on oil prices

To help explore the intricacies of European equities, the team was joined by Richard Pease of Crux Asset management. Richard has over three decades’ experience investing in Europe, including periods at Jupiter Asset Management and Henderson Investors. The call was hosted by Paul Sarosy, Managing Director of Client Investment Management Services at Coutts and Alan Higgins, Head of Portfolio Management and Construction.

Some of the main points are summarised below.


Don’t miss out on our next Ask the Investment Team client call in January. We will be sending an email invitation to all our clients soon with full details on how to register.

How are Coutts portfolios responding to the prospect of rising inflation and interest rates in 2017?

Alan Higgins: Globally, inflation is rising very modestly. The consensus view is that we can expect at least two more rate increases in the US next year, and markets can deal with that provided we have a reasonably strong growth outlook. We believe the next move in UK interest rates will be up, but it’s at least a year off. With quantitative easing continuing it’s going to be a heavy hurdle for the Bank of England’s Monetary Policy Committee to raise rates, in our opinion.

So, what does it mean for bonds? Bonds are the most interest rate sensitive part of our portfolio and it means having less of them and investing in other assets, or in bonds – such as financial credit – that have less sensitivity to interest rates.

A lot of companies rely on freedom of movement in either expertise or labour. How do you factor that element in to the fundamentals of a business in the wake of the UK’s plans to leave the UK?

Richard Pease: What one hopes is that we will be able to reach some sort of compromise that does allow hard-working EU nationals to stay and work in the UK. I think there’s quite a lot of pressure to get that achieved. But like a lot of these things we haven’t got there yet and I think this is one of the reasons that the market is a bit volatile over Brexit.

As far as the Crux Asset Management portfolios are concerned, we don’t tend to have very aggressive exposure to this issue. If you talk about some of the other obvious bigger positions we’ve got, they’re pretty global and not going to be quite so obviously affected. But, sitting in the UK I can totally understand your concern.

What do you think the effect of a US rate rise will be on the euro/dollar exchange rate?

Alan Higgins: The eurozone has a large current account surplus and within this Germany has a fantastic current account surplus. So from our point of view it’s not a pair trade worth playing aggressively. Our bias would be more in terms of coming back into sterling for the vast majority of our portfolios, which would indicate some down side for the euro, but we don’t think it’s a strong enough signal in terms of our process to put in a trade. In effect, the higher interest rates in the US are balanced out by the effect of a large current account surplus in the eurozone

Richard Pease: One of the reasons that Germany has been prepared to keep playing Father Christmas with the likes of Greece is because they do get this nicely competitive currency to sell their BMWs. It’s very driven by German exports being competitive as a result.

What opportunities and risks do you think that the political backdrop in Europe could offer next year for investors?

Richard Pease: If you look at what’s happened in the US with the surprise outcome of the presidential election and victory of Trump – which the markets did not particularly want – it’s actually been absorbed very easily. I would always take some comfort from the fact that the sorts of investments that we make have very sticky revenue streams, they’re very global, and they’ve handled all sorts of crises in the past. I don’t think that any of our investments are big bets on any particular political outcome. Sometimes one wishes they were because you could have a wonderful week, but we don’t tend to do it that way.

In terms of European politics, it can be very hard to predict what will happen. Where we stand now is very uncertain and I think that makes it all the more important to stick to our principles in what we look for. I can understand that there can be ugly headlines and ugly politics and we’re going to have to live with it. But it doesn’t mean that we should ever consider not investing because I think that would be huge mistake, as has been shown during the last 10 years.

How do you calculate the risks of regulatory changes – for example in India with Prime Minister Modhi – in an investment decision? If you have two equivalent companies, one in, the US and one in India, how would you factor in the regulatory environment in your investment decisions?

Richard Pease: My view is that I’m not comfortable with some of these aggressive emerging market stories, simply because I think you can just get badly treated. We invest in good businesses where we feel very comfortable about management and alignment of their interests with shareholders, and they can take a much better informed decision about whether or not to invest in their niche.

One thing we’ve always liked is companies that do something very significant for their customer but at a very insignificant part of the cost. For example, a company like Givaudan, which is a Swiss-based global leader in flavourings and fragrances, has significant exposure in India, but it’s not something that can be beaten up, because big global food companies like the Nestlés of this world need them to help make the things you eat taste good and be better for you. So we would rather get exposure to emerging markets that way than take a big bet in one emerging market.


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