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Investing beyond Brexit

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Summary

Our investment experts are looking beyond the results of Brexit to consider where the opportunities – and challenges – lie and how to create the right mix of assets for the months ahead.

3 min read

As hard as it can be to imagine, there will be a life beyond Brexit. In the next few months, the uncertainty will be resolved and we’ll be looking forward to the best way to preserve and grow our clients’ wealth in the coming months, through 2020 and beyond.

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?

resurgent europe

Lilian Chovin, investment strategist

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.

domestic uk companies return to life

Monique Wong, portfolio management

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.

“Over the last 12 months or so, we’ve been positioning our funds and client portfolios more defensively in response to slower growth. However, our own analysis of macroeconomic trends suggests that the global trend could be about to change.”
Vinod Nehra, investment strategist

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Rate cuts boost US government Bonds

Alan Higgins, managing director, asset management

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.

signs of recovery in the global economy?

Vinod Nehra, investment strategist

Over the last 12 months or so, we’ve been positioning our funds and client portfolios more defensively in response to slower growth. However, our own analysis of macroeconomic trends suggests that the global trend could be about to change.

Our in-house measures show that data is beginning to level-off and may be improving for some of the major economies outside the US. It’s most noticeable in China and Europe. The US is still slowing, but as the last major economy to move into slowdown towards the end of last year, it may be a little out of sync with the rest of the world.

If economic data improves, then the business cycle is likely to move into a recovery/expansion phase. That would be positive for shares and corporate debt, and negative for government bonds. The risk is that bond yields will rise (prices fall) while equities fail to recover.

Systemic risks remain, however, and supportive central bank policies have been priced in to equities already. So, if the data was to further deteriorate rather than continue to improve, then equity prices could fall.

If you would like to talk to one of our advisers about investing with Coutts please speak to your private banker who is always ready to help. You can also find out more about our investment services here.

When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

Key Takeaways

The next quarter should see Brexit resolved and our investment team is looking ahead to see where the opportunities lie and how to create the right mix of assets for the months ahead. We think the key things to consider are:

 

  • European equities, which could benefit from stronger growth in key export markets, such as China
  • UK domestic stocks, which should do well in the event of a pragmatic Brexit
  • US Treasuries, which offer relatively high yields and should rise in value as the Fed lowers rates
  • The possibility that the business cycle could be about to turn, which would favour equities and credit over bonds

About Coutts Investments

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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