2016 and before
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
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.