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US government shutdown – what’s next?

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Summary

A government shutdown is unlikely to dampen investor enthusiasm for equities

2 min read

Business as usual for markets despite US government shutdown

We are expecting markets to be broadly unaffected by the US government shutdown in Washington today.

The Senate failed to pass its annual budget bill on Friday due to disagreements between Republicans and Democrats on immigration measures attached to the bill. This leaves many federal agencies without funding and they are now forced to shut down until a budget can be agreed.

We have seen high profile US government shutdowns in the past and they have had very little impact on equity markets. In 1995 and 1996, for example, during the Clinton administration, there was a three-day shutdown in November and a 21-day shutdown across December and January caused by similar policy deadlocks. Despite this, the S&P 500 rose by about 1.3% from the start of the first shutdown to the end of the second. Over the two-week shutdown in October 2013, during the Obama administration, the S&P 500 rose by 0.7%.

Similarly, bond yields in these periods didn’t move appreciably.

Investors generally remain sanguine on these occasional disruptions which is right in our opinion. The focus should remain on the underlying health of the global economy and the profitability of the corporate sector – both of which we see as strong.

Some short-term volatility could creep in but investors are more likely to see this as an excuse to take profits. We don’t expect major market moves and see no need to change our positioning at this stage. We are monitoring the situation and will be watching bond yields and earnings-per-share data for any signs that a greater reaction is growing.

“We have seen high profile US government shutdowns in the past and they have had very little impact on equity markets.”

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Flights, toys and games drive drop in inflation

UK inflation fell to 3% in December, down from 3.1% the month before, largely because of lower air fares and a drop in prices for toys and games.

The news adds weight to the Bank of England’s comments in December that inflation has peaked and will trend downwards throughout this year.

Inflation remains a real problem for savers as bank deposit rates are well below the level of inflation, eroding the spending power of cash. Wealthy individuals face even fiercer price rises than other consumers. The bi-annual Coutts Luxury Price Index, last published in November, showed that the price of a high-end mobile phone shot up 36% in a year while luxury alcohol costs rose 31%.

Meanwhile, inflation appears to have hit consumer behaviour in December. According to the Office for National Statistics, UK retail sales fell 1.5% that month, more than was expected. This should not be too much of a cause for concern in our view, though, as falling inflation should boost consumer confidence in the coming months.

Our view on UK equities is that, while they remain vulnerable in the face of Brexit negotiations, they are supported by the robust global economy as the FTSE 100 generates about two-thirds of its revenue from outside the country. In addition, dividend yields in UK companies are supported by strong earnings, providing a lot of value from staying invested. 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.

 

Absolutely fabulous award wins

Coutts has won two prestigious awards for the exceptional way it manages clients' money.
The bank won the Gold Prize for Absolute (Real) Return Portfolios – for the second year running – and for Cautious (Defensive) Portfolios at the Portfolio Adviser Wealth Manager Awards 2018.

Funds were assessed based on a two-part judging process. In the first stage, wealth managers were asked to pitch how they would manage a client's wealth based on different scenarios, and in the second stage fund performance was assessed by independent experts.

Mohammad Kamal Syed, Managing Director at Coutts, said: “These awards recognise exceptional talent in managing client money across widely used client mandates. Congratulations to all of our team for their effort and dedication to achieve this accolade.”

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With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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