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Sterling Rallies On Brexit Breakthrough

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Summary

The investment implications of Trump’s tax plans, the Brexit ‘divorce’ and China’s debt issues

2 min read

Brexit clarity supports sterling

Sterling rose following the breakthrough in Brexit negotiations between the UK government and European Commission. The agreement on the ‘divorce settlement’ of up to £39bn and administration of the border between the Republic of Ireland and Northern Ireland paves the way for trade talks to begin.

The announcement saw sterling reach a six-month high against the euro.

The pound still looks inexpensive to us by long-term standards and we believe it is undervalued. It dropped dramatically following last year’s European Union referendum but we see it eventually returning to something closer to historic levels.

While Brexit presents some headwinds, we believe the UK economy remains in reasonably good shape supported by global growth. GDP expanded by 0.4% in the third quarter – compared with the second – faster than expected and up from 0.3% in each of the previous two quarters.

We have a neutral exposure to UK equity, tilted towards high-quality large-cap companies with significant overseas earnings which make them less dependent on the domestic economy.

 

Trump’s tax plans could be good for equities

President Trump’s proposed tax reforms in the US have been approved by the Senate. The changes include cutting corporation tax from 35% to 20% and introducing modest income tax breaks for most Americans.
The Senate and House of Representatives now need to finalise the details before the President can sign the plan into law.

“Generally, US economic growth remains solid and continues to drive positive market momentum worldwide. These tax cuts have the potential to boost that even further.”

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Trump’s plans could be good for shareholders as they might benefit from the extra money companies get from the corporation tax cut. But the reforms could be a drag on bonds as reduced tax revenues create wider deficits, while the higher inflation that might come from consumers spending their tax windfall could make yields less attractive.

Generally, US economic growth remains solid and continues to drive positive market momentum worldwide. These tax cuts have the potential to boost that even further.

At Coutts, we prefer equities to bonds and believe European and Japanese equities offer relatively attractive valuations and strong earnings growth potential compared to the US and other equity markets.

 

China’s debt back in the spotlight

The International Monetary Fund has expressed concerns about the risks of rising debt in China. The organisation also flagged that risky lending is now cropping up from “less-well-supervised” parts of the financial system.

At Coutts we believe China has the resources to deal with its debt issues as it works towards a more balanced economy with better quality growth. These objectives were echoed at the recent 19th congress of China’s Communist Party. 

We are broadly positive on the country’s prospects and see no reason to change our view at this stage.

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