6th June 2017

Rathbones weekly review: Focus on security as election looms

For the third time in three months, the spectre of Islamic State terrorism cast its shadow over the UK this past weekend, with seven people killed and dozens injured in an attack on London Bridge and Borough Market. This once again focused attention on national security as Thursday’s general election looms. The campaign was briefly suspended after the London Bridge attack, but Prime Minister Theresa May insisted voting will go ahead as planned.

Labour closes the gap

Political uncertainty continues to weigh on investor sentiment ahead of the election, and if recent polls are anything to go by, this week will be challenging for the Conservatives as Labour closes the once healthy Tory lead. However, from recent experience, what credence can we place on polls? We’ll soon find out.

In what has been billed as an election about leadership, many voters may be feeling uninspired and unsure, and sterling weakness has continued in the light of the shrinking Conservative lead. The fall in sterling has been a blessing for internationally-focused FTSE 100 companies, whose goods and services become cheaper in foreign currency terms as sterling falls, though both the index and sterling were fairly flat last week.

Source: FE Analytics, data sterling total return to 2 June 

Geopolitical climate heats up

The geopolitical climate heated up a bit last week following President Trump’s announcement heralding the withdrawal of the US from the landmark Paris climate accord. Justifying the withdrawal, in his ‘America first’ address, he cited his desire to protect the US economy from a deal that would cost American jobs and money. This sets the wheels in motion for a lengthy withdrawal process, although the President seems focussed on engaging in negotiations to re-enter the accord on terms that he perceives as being fairer to the US.

Yet, the rest of the world largely condemned the decision and pledged to push on with commitment to the accord, as did some US states. In a further blow to the President’s prestige, Elon Musk, who had worked hard to make the case for remaining in the accord, revealed that he was withdrawing from the White House advisory council following the decision. 

Oil prices slid on the news, given expectations that restrictions would be lifted on production of US coal and other ‘old-energy’ sources, while shares in renewable energy producers had already fallen in anticipation of the announcement. No real long-term market implications are expected, however – it is clear that despite President Trump’s decision, the trend toward renewable energy is here to stay. Overarching global forces will continue to provide a tailwind for sustainable/renewable energy, which are already well-established investment themes.

While the intermittency of some sources of renewable energy like solar and wind power has hindered wider take-up, rapid improvements in battery technology could help (see Charging forward from our recent report on disruptive technologies for more). Through advances such as battery storage technology, we may be on the cusp of major changes for electric vehicles and alternative energy. These are likely to be highly disruptive to traditional utilities, while less reliance on fossil fuel consumption could have significant geopolitical implications. 

Despite tepid jobs growth, US markets were buoyed as factory activity edged up and private payrolls surged, leading to solid gains in the S&P 500. Tightness in the US labour market, with the unemployment rate inching lower to 4.3% from 4.4%, suggests that employers may still be looking to hire, but there is difficulty in finding qualified candidates. May nonfarm payrolls were up 138,000, well below April’s downwardly revised 174,000 level and weaker than the 182,000 expected.

Equities and bonds still moving in tandem

For yet another week, major equity markets and safe-haven government bonds both rose. Equities shrugged off political uncertainty as economic data remained generally upbeat, edging higher, while safer bonds continued to enjoy strong demand too, despite yields being very low. Perhaps investors are hedging their bets, but the general tendency of these asset classes to move in different directions should eventually reassert itself.

The bottom line

We are all now used to expecting the unexpected – unpredictable politics is a real everyday theme we are all adjusting to.  Whoever is victorious in the general election this week, they will lead the country into crucial Brexit negotiations, which commence just 11 days after the election on 19 June. Regardless of the election outcome, Brexit-related uncertainty will continue and only clear up gradually as details emerge, which is likely to take some time.

Bonds

UK 10-Year yield @ 1.01%
US 10-Year yield @ 2.25%
Germany 10-Year yield @ 0.33%
Italy 10-Year yield @ 2.10%
Spain 10-Year yield @ 1.53% 

Julian Chillingworth
Chief Investment Officer

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Investments, Investment Commentary