Our director of investment strategy, Brad Holland, joins us for a check-in on the markets and how Brexit and the US election might affect them.
How do you expect the pound to react to any Brexit resolution and how might this impact UK equities?
The market doesn’t seem to be responding to Brexit rhetoric at the moment as there are so many tactical manoeuvres from both sides. We expect a compromise to be found at the last minute which may induce some further market volatility. We’ve become more neutral in our pound exposure but remain underweight in our UK equities until we get more clarity about how next year looks.
In the UK, like everywhere else in the world, a key factor will be the pandemic and whether lockdowns remain in place. Economic signs are promising, especially from the US labour market data but it is still early days and this will shape the UK 2021 economic landscape as much as Brexit.
What impact do you think the forthcoming US election will have on markets?
The market doesn’t seem to be afraid of a Democratic White House. As Joe Biden’s poll position has solidified, US markets – including tech markets – have remained near their highs.
There seem to be several reasons for this.
Firstly, policy makers are intent on maintaining stimulus. While Democrats and Republicans have electioneered around the desired size of stimulus, the reality is that policy makers are committed to safeguarding economic recovery. Indeed, the Federal Reserve’s governor, Jay Powell, has called for the Treasury to spend more on fiscal policy. Bond markets do not seem to be too worried about this, as long as the Fed keeps the cash rate low; which is their intention.
A second reason for apparent market calm around the election is the market know the winning candidate could well be limited in what they are able to achieve without control of both the House and the Senate. Yes, on a Biden victory company taxes are expected to be raised, but higher fiscal and infrastructure spending will offset those hikes.
Thirdly, the market expects a number of vaccines to enter production stage within months, and despite the second-wave in the Northern Hemisphere, the health pandemic is believed to be more manageable going forward. On top of that, the market suspects a Biden administration would be more adept at handling future problems.
So, for all these reasons, the market looks quite composed, for now anyway, ahead of the US election.
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