Economics

Schroders Live: Brexit, US elections and central banks in focus

At our Schroders Live event on 28 September, Senior European Economist & Strategist Azad Zangana and Multi-Asset fund manager Remi Olu-Pitan, discussed the major themes in markets with Manus Cranny, Bloomberg’s European Markets Editor

28 September 2016

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

Remi Olu-Pitan

Remi Olu-Pitan

Fund Manager, Multi-asset

The UK post-Brexit vote

Three months on from the UK’s surprise decision to withdraw from the EU, the UK equity market has proved resilient, with the FTSE 100 now higher than it was before the Brexit vote. It still offers opportunities for investors, according to Remi Olu-Pitan.

“The large cap part of the market is particularly attractive and certainly more appealing than UK gilts. Sterling’s weakness will be a further advantage to UK equities”, she said.

However, it is too early to draw any major conclusions about the economic impact just yet, according to Azad Zangana.

He pointed out that even though the Bank of England has delivered far more on monetary policy than most had expected, the authorities are still very cautious on what Brexit is going to look like and what the economic ramifications are likely to be.

Central banks running out of steam?

Remi believes there to be scope for further interest rate cuts and more quantitative easing in the UK but that negative interest rates are not working.

“We’re seeing diminishing marginal returns from this course of policy action and it’s one of the reasons the yen and euro have both been stronger than the respective central banks have expected this year”, she said.

In terms of quantitative easing, Azad’s view is that central banks are beginning to run out of options for purchasable assets under their current programmes and that there will be a move toward more fiscal stimulus.

Remi thinks investors can get exposure to fiscal stimulus through more cyclical areas of the market.

“Some of the capital goods and construction companies will be well-placed in the event that fiscal stimulus takes the form of infrastructure spending”, she said. Remi also pointed out that these areas are currently trading at discounted valuations in Europe and the US.

US presidential elections

Turning to politics, the major theme is the US presidential race, and both panellists shared their views.

From an economic perspective, Azad believes the main concern is foreign policy regardless of which candidate wins, as “protectionism would take the US in a more stagflationary* direction”.This is because trade tariffs would raise the cost of imports for consumers and could harm exporters too if trade partners retaliate by lifting their own import duties.

Asked if there could be any positive policy changes if Republican candidate, Donald Trump, were to take office, Azad suggested that some of Trump’s corporate tax reforms may be beneficial insofar as they encourage companies to repatriate overseas profits.

“This could be good for equity investors if it comes through”, he said.

According to Remi, a Trump victory would herald in an era of uncertainty but that any volatility would likely present a buying opportunity.

Are markets in bubble territory?

She conceded that US equity valuations are stretched compared to history, but not when compared to the bond market.

“As investors we have to be pragmatic in accepting that we are being forced to buy expensive assets and that’s the only way we can generate returns”, Remi said.

In her view, the bond market is in a bubble, as are bond-like equities but there are parts of the equity market that are attractive.

“You’ve got to dig deeper to find pockets of value. In the equity markets, these can be found in certain sectors such as energy and financials, although one has to be careful of potential 'value traps' in the latter,” she said.

She also highlighted the attractive valuations of emerging market equities and revealed that Schroders' Multi-Asset team has been increasing its exposure to this part of the market over the course of 2016.

“A weaker dollar has taken the pressure off emerging market equities but now we need to see earnings recover, which may require some patience”, she said.

*A condition of slow or stagnant economic growth, inflation and high unemployment.

Important Information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.