Market review: Andrew Milligan's final thoughts

Andrew Milligan

In his last market review for us before retiring, Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments, considers some of the key global events currently having an impact on economies and markets, including Brexit, the coronavirus, government spending and interest rates.


31 January marked the start of the next phase of the Brexit process

But, it’s too soon to tell what the full impact of Brexit will be. This partly reflects the fact that the UK and the European Union (EU) are about to enter complex discussions about many areas – fishing, finance, trade in goods and in services, the exchange of data and security to name but a few. By the end of the year there’s likely to be some sort of agreement, but how broad it will be remains debatable. Negotiations over the coming months should give us a better idea how far apart or close the future relationship will be for sectors and industries. In turn, that should signpost whether economic growth in the next couple of years will be affected materially or only marginally. 

The second point to emphasise is that Brexit is a process, not an event, and it will take place alongside pressures facing both the UK and EU economies. Will the UK achieve a shift towards an economy based much more on research and innovation? Can the EU cope with migration and fiscal pressures? How will both economies tackle climate change issues, as well as the technological and trade threats and opportunities from the US and China? The answers to these will feed through into economic forecasts and, in turn, will affect markets either positively or negatively.

We’re cautiously optimistic about UK equities, particularly small and mid-caps, on valuation grounds. But the UK Budget in March may have a bearing on that. The debate in the recent election wasn’t about the direction of government spending but about the amount of money to be spent; more will appear for health, infrastructure and key regions. We’ll need to assess the detail on 11 March, in particular the Government’s business strategy, as that will be important for many sectors and companies.

Interest rates remain the same… for the time being

Although the Bank of England held rates at 0.75% in January, cuts later in the year are still possible – for example if the coronavirus causes a major global downturn. But it’s highly unlikely they’ll go as far as zero. Interestingly, the Swedish central bank recently raised its official rate back to zero, as it’s becoming clearer that banking systems don’t work well in an environment of negative yields.

Changes in interest rates of 0.1% or 0.25% will probably matter little for savers or borrowers, but they can give an indication of the direction of travel for central bank policy. In the UK though, we would see any decision by the Bank of England to revive quantitative easing as a more important tool than interest rate cuts. 

Retail gloom is likely to continue 

2019 was another torrid year for the UK high street, with more major retailers and restaurant chains going into administration, including Mothercare and Jamie Oliver’s UK restaurant group. Of course, it isn’t only the UK which is affected – it’s a global phenomenon because of the rise of e-commerce.

The latest survey from the Confederation of British Industry showed no improvement in retail sales volumes compared to a year ago. This is likely to mean further bankruptcies, in turn forcing landlords to reassess how much rent they can charge.

Of course, much of this is already priced into markets. It’s also worth noting that consumer discretionary stocks, which include these types of businesses, only make up about 8% of the overall UK stock market – and within this there are e-commerce winners too. We’re highlighting that the sector will remain volatile as business models have to adapt, so active fund managers and investors may see it as a useful area to consider.

Some governments may open the purse strings, cutting taxes and boosting spending

I touched on this in last month’s market review, but it must be pointed out that we aren’t expecting a major fiscal stimulus across the world. It will only be in countries such as China, Japan, the UK and Italy. It won’t happen in the US or Germany. Even where countries do use fiscal stimulus, the devil will be in the detail. Politicians tend to add up multiple years of spending into large figures to try and impress voters. Our job is to work out the actual size of the new measures.
It’s also important to remember that any expansion of fiscal policy will take time to have an effect. This is even more so if consumers and businesses are worried, as they’ll tend to save extra money rather than spend or invest it.
The other thing to bear in mind is that although many countries are crying out for infrastructure spending, such expenditure faces many barriers including local planning rules and environmental concerns. In the UK, the sagas over Heathrow Airport’s third runway and the HS2 rail link are two prime examples.  
As and when the next downturn comes, expect the fiscal taps to be turned on. Until then, it’s a useful factor to support some countries and hence equity markets in coming months. 
The novel coronavirus is likely to have a major impact on the Chinese economy 

Although we believe that the epidemic will be contained – there should be a vaccine by the summer – the economic impact on China is still expected to be noticeable. This is because a lot of discretionary spending, travel and tourism will be cancelled rather than merely delayed. Economic growth is likely to be 4-5% rather than the 6% previously expected for the first quarter, so the Chinese government has already started to come out with a package of fiscal and monetary measures to counteract this.

In terms of the impact on markets, luxury goods and travel companies may come under further pressure in the short term as China is an important market. Commodity prices are already much lower. History suggests that as long as a pandemic is avoided then short-term effects will be priced in and then priced out within a few months.

Geopolitical issues continue to create volatility

Trade and oil are two examples of other issues which could act as headwinds to the world economy this year. We’ve already seen tensions in the Middle East; looking ahead, there are political sensitivities in Italy, threats from President Trump about tariffs on European car exports, plus potential problems from climate change, to name but a few.

The key message is that events like these can create volatility in markets. What we need to do is work out the underlying signal from all the noise. Is the global economy avoiding recession? Is economic policy supportive of growth? Can companies grind out profits growth? If the answers to these remain ‘yes’, as we expect, then at Aberdeen Standard Investments we’ll continue to favour more risky assets in our funds rather than taking an overly defensive approach. Portfolio construction isn’t straightforward in these circumstances. Some investors prefer to hold onto cash, to put into markets when there are valuation opportunities. Others prefer to create a diversified portfolio of higher quality assets to live through these periods of turbulence. 

And finally, it’s goodbye from me and welcome to Richard Dunbar

With regret, I must tell you that this will be my final article. I’m retiring from Aberdeen Standard Investments after 19 years as chief investment strategist. I hope that you’ve found some of my views and analysis useful, whether you’re an investor or you’re advising clients on investments. 

Next month you’ll hear from my expert colleague, Richard Dunbar. Richard is Head of Multi-Asset Research here at Aberdeen Standard Investments and his years of experience will help guide you through the complexities of investing in the 2020s. Good luck!


The information in this article should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up and may be worth less than you paid in. Information is based on Aberdeen Standard Investments’ understanding in January 2020.