Investing beyond Brexit

With this in mind, we asked four of our investment experts one question:

What are the key investment opportunities to look out for beyond Brexit?

We’ve seen before that improving economic conditions in China often lead to rising returns from European equities as trading conditions improve. While China has been struggling with the effects of the trade war with the US, and slower growth caused by a period of debt reduction in recent years – with a knock-on effect on Europe – we think this is changing.

Economic data suggests that the business cycle is turning and economic growth in China is set to accelerate. In the meantime, ongoing talks with the US have seen a truce, of sorts, being established in the trade dispute.

This should be positive for European equities. In the meantime, the European Central Bank has loosened monetary policy, providing a supportive environment for shares, and the opportunity hasn’t been fully grasped by other investors.

There are some notes of caution around the potential for the trade war to flare up again and a messy Brexit, but we’ve recently added to our allocation to European equity to take advantage of this opportunity.

You only have to look at what happened last week to see that a sudden change in the political weather can lead to sudden shifts in market sentiment. Last Friday, the FTSE 250 – which represents smaller, more domestically oriented stocks than the FTSE 100 – jumped by 6% on the news that a Brexit deal was looking more likely, twice the move of the FTSE 100. 

This highlights a key opportunity as the Brexit process progresses. With so much negative Brexit sentiment priced-in to UK equities there’s a case to be made that anything short of a cliff-edge no-deal should be positive for these companies.

Our investment strategy isn’t contingent on binary political bets. Our portfolios are internationally diversified and the bigger driver is the global economy. However, we currently have a modest preference for sterling assets in our UK-based portfolios, including an allocation to domestic stocks which could benefit from a pragmatic Brexit.

It’s a low rate/low inflation world and we don’t see this changing any time soon. Central banks are keeping rates low to stimulate growth, but globalisation and technology-related disruptions like ‘amazonisation’ – where consumers can increasingly use online platforms to find the best value for goods and services – remain powerful drivers of low inflation.

Consequently, bonds provide important ballast to portfolios and go some way to protecting clients’ wealth against market volatility. With this in mind, they’ll always have a role to play.  

Right now, we see US Treasuries offering the best opportunities for investors. Yields are high relative to other developed markets and rate cuts from the US Federal Reserve (Fed) are supporting prices. Gilts, in contrast, are less compelling with rates already very low and further cuts unlikely except in the case of a no-deal Brexit, the probability of which has retreated substantially.

We also have a ‘curve steepener’ trade in place, which should benefit as the Fed cuts rates. This favours short-term bonds which increase in value in a rising rate environment over long-term bonds, which fall in value. This helps to further diversify portfolio returns for our clients and protect them from volatility in other areas of the market.