Tatton News Archive

New article from Tatton Investment Management: Summer heat wave makes way for return of political he

10 August 2018

Having returned from my annual summer holiday that took me across the heat-parched landscapes of western Europe, it feels like I have been cheated for the summer lull. As last month’s asset class returns table above shows, July turned out to be a decent month for most investors despite all the dark clouds on the economic horizon, be they trade wars, looming Brexit headwinds or Emerging Market stress from US$ strength.

As the summer heat wave made way across much of northern Europe, all the above appear to suddenly have returned to the attention of market participants. It is also bolstered by some additional ones, like the resumption of US sanctions on Iran and a fast deteriorating outlook for the Turkish economy as the Turkish Lira entered a tail-spin as the result of US sanctions. The only bit of adverse news that cannot be blamed on Donald Trump’s unorthodox political style was the return of hard Brexit fears.

Interestingly, it was the Brexit aspect more than anything else that seemed to capture the imagination of the UK investors – or at least that was my impression from the enquiries I received (or rather requests for reassurances that even if the UK was to go down the economic drain as a result of a disorderly Brexit we would have means of protecting retirement nest eggs from any resulting market downdrafts).

This did remind me of the time ahead of the Brexit referendum in May 2016 when similar requests reached us as the Remainer campaign beat the drum that a Brexit vote would lead to immediate economic disaster for the UK. This time it is the Brexiteers’ turn for scaremongering, having turned from assuring the public that the EU 27 would have no other choice than offer the UK preferential trading terms to predicting a crash Brexit that would bring inevitable pain to both sides.

Just as then, the headline-grabbing scare statements have political purpose but little predictive relevance. First and foremost, politicians seek to get re-elected. Leading a nation or economic area knowingly and unnecessarily into economic hardship has historically not proven a vote winner. This applies to both sides of the negotiations and makes a ‘Fake-Brexit’ the most likely outcome, both for 2019 and also likely thereafter.

But then again there is politics. If Dr Fox’s message was intended to threaten the European public that harm may come upon them unless they put pressure on their politicians to sway un-elected Eurocrats to become more Brexit pragmatic, then would it not also be possible that politicians risk a crash Brexit, exactly to prove how deeply committed they are to their respective electorates? After all, letting Greece go over the national default precipice also did not make any economic sense for the wider Eurozone, but appeared politically necessary to gain public support for the terms of eventual bailout - on both sides.

This is the only theoretical risk I can see in terms of the looming March 2019 Brexit. Should politicians on either side fear that they might suffer negative electoral consequences should they agree to a compromise, then there is a small possibility that they may feel the need to demonstrate the repercussions of a crash Brexit by inflicting chaos for a few weeks. Such brinkmanship is still much less likely to happen as was the case with Greece, because arguably more level-headed politicians are conducting the negotiations. Also, irresponsible action as described above would be more than sufficient to end political careers.

We feature a separate article on the subject and so we will leave it here and return to matters which are more likely to actually influence medium term investment returns.

From our perspective, the increased use of economic pressures by the Trump administration in the US is proving far more unnerving. Strong US economic momentum that has been further boosted by the one-off effect of tax cuts has led `US stock markets to seemingly ignore the potential for a trade related downturn. As the returns table at the top shows, the rest of the world has been far less blasé. Whether this US investor attitude will continue is discussed in another article this week, which looks beyond the headline profit growth numbers in the US and suggests that, while the US economy may be doing better than the rest at the moment, corporate earnings momentum may already have slowed considerably.

The US sanctions on Iran, Turkey and Russia may have stolen the headlines over the week, but frankly the economic consequences of those are miniscule compared to the ratcheting up of the trade war with China. It is hard to see how either side can step back from the current tit for tat, at least until the US midterm election in November. On the other hand, given Trump’s political style is so much more akin to US (Show) Wrestling than Olympic wrestling, anything seems possible. That appears to be exactly what US investors still expect; it’s all just a big show.

If they are right in their assessment, then markets beyond the US would have considerable catching-up potential. But if not – even just in terms of timings until the conflict is resolved – then the US markets are more exposed than the rest and another down-leg of the February/March correction is possible. Bearing this in mind, we are comfortable with the slightly cautious stance we currently have in the Tatton portfolios and the underweight to US equities. July has shown that timing is fiendishly difficult, but August so far has demonstrated that fundamentals eventually come through in market action.