Market review – market highs and sterling lows

Andrew Milligan

With UK markets reaching record highs, supported by sterling weakness, Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments, considers what’s driving markets and where investors can find opportunities. He also takes a closer look at commercial property, emerging markets and what political uncertainty in Italy could mean for financial markets


Sterling eased lower helping UK share prices towards record highs

Once again sterling fell back against the US dollar, less so against the euro, during the month of May. This was partly due to renewed worries about the UK’s Brexit negotiations, but more so because of a rally in the US dollar. This happened as global capital began to retreat towards US assets, attracted by higher US bond yields while being discouraged from investing overseas due to President Trump’s announcements on trade issues.  As sterling eased lower, the FTSE®100 index reached a new high of almost 7900.

Why has the UK stock market rallied? As we’ve explained before, when sterling declines this is helpful for the profits of many of the UK’s largest firms, either through translation effects from overseas operations or from more competitive exports. There are other issues though. Stock markets are forward looking, and there is a general expectation that the UK economy is likely to recover from its weak patch in the spring, helping some of the domestic orientated companies. Then, oil plays a key role. A combination of political issues and supply disruptions in countries such as Venezuela has pushed the global oil price higher. This supports an important sector for the UK stock market.

At Aberdeen Standard Investments, we’re broadly neutral on UK equities in our portfolios as we prefer faster growing parts of the world.

Equities and bonds – economics and politics

Equities and bonds are responding to similar forces this year. On the plus side there’s a growing realisation that the world economy will grow quite well, despite a poor start to 2018.  Currently companies are flush with cash, so are hiring and investing more. On top of that, unemployment is coming down, wages are edging higher, and the US central bank has warned about further interest rate increases. And while profits growth may have peaked in the spring, it still looks very robust going into 2019, especially if oil and commodity prices hold up.

However, it won’t all be smooth-sailing. Alongside such economic fundamentals, we also have to assess the importance of political events, such as the trade conflicts between the US and China, what’s happening in Italy and Spain, or developments in the Middle East. Much of that news is not helpful for business confidence. All in all, at Aberdeen Standard Investments, we’re overweight in global equities, supported by that profits growth, and underweight in global bonds, as yields are expected to rise and prices fall while central banks slowly tighten policy.

Property prospects

Is commercial property in the UK an attractive asset to own? The answer depends on the reason to hold it. Such property has generally recovered well since the EU referendum. However, we think the commercial real estate cycle in the UK has reached a mature stage with limited prospect for further capital growth.

Income from real estate remains relatively attractive in a world of low interest rates. But property is a long term investment, and its risks shouldn’t be ignored. These could include economic conditions eventually turning recessionary, or an increase in political uncertainty affecting certain sectors, while let’s not forget how technological advances such as online shopping or working from home are upsetting many high street retailers or office locations.

Emerging markets still offer opportunities

Several factors, including Argentina’s application to the International Monetary Fund (IMF) for a bailout, have raised concerns about emerging markets. At Aberdeen Standard Investments, we still like emerging markets but diversification and selection are key. 

A point I emphasise is that emerging markets cover a very wide range of countries and regions. Russia isn’t the same as the Philippines, and the Middle East is very different to Eastern Europe. There are some common drivers, for example consumer demand in the West, but many differences. While some countries benefit from oil at $80 a barrel, others suffer.

For some years we’ve been exploring the vulnerabilities and risks of emerging markets faced with tighter US monetary policy. The good news is that most emerging markets are in a good position, with debt levels under control. The bad news is that there’s a short list of countries which can suffer from such risks as US sanctions, a rising US dollar, geopolitical risks and poor government.  For example, Turkey and Venezuela are very much in the news today.

There’s no doubt emerging markets still offer opportunities, but it’s crucial to be selective when choosing which emerging market debt or equity funds you buy.