There is never a dull moment in financial markets.
U.S. Phase-One Trade Deal
It has been reported U.S. President Donald Trump has signed off on a phase-one deal, which will importantly prevent additional tariffs being introduced on 15 December on approximately $160bn consumer goods. From our perspective, its 13 Dec-19 and something had to be announced hence it shouldn’t come as a surprise. Further, it was noted terms are agreed but legal text has not. Part of the deal is a promise by China to buy more agricultural products (nothing new here). Nothing firm on removing existing tariffs though. No developments on the structural changes the U.S. seeking. On balance this is a positive update but one the market probably was anticipating.
BREXIT – Looks like Labour (UK) didn’t learn much from Labor (Australia)
U.K. exit polls a forecasting a majority win for Boris Johnson’s conservative party, predicting that he will secure 368 of 650 seats up for grabs in the House of Commons. To put it in context, if this majority holds at the final count, this will be the biggest win for his party since Margaret Thatcher’s in 1987. This now means the U.K will leave the European Union next month (revised deadline of 31 January 2020). With less radical policies to opposition leader Jeremy Corbyn (he wanted tax hikes + nationalisation of some industries) and certainty over Brexit date, the markets are likely to react positively. The pound is up at the time of writing. Quick perspective on the impact of the uncertainty – the Bank of England Governor Mark Carney recently noted that the current level of investment is approximately 25% below where investment would if there was not Brexit uncertainty. Whilst it is very early days (and plenty of details still to work out), it is a positive start to perhaps finally putting the Brexit saga in the rearview mirror.
How have we exposed to Brexit in our portfolios? We have been highlighting the opportunities and challenges around Brexit since the start of 2019 – discussed multiple times in our Multi-Asset Strategy Quarterlies.
Australian equity strategy – we hold overweight positions in Virgin Money UK (ex CYBG Plc) (UK Bank) and Janus Henderson Group (Fund Manager with extensive European operations)…both of which are rallying today on the back of early exit polls, in our view. We note Virgin Money has significantly outperformed the market in the second half of this year as Brexit comes to a head (specifically the realisation a hard Brexit was likely off the table) and but operationally the Company provided a positive FY20 outlook on net interest margins at the recent full year results. Janus Henderson has consistently outperformed the broader ASX200 this year and continues to offer an attractive yield of 6.0% (even after the rally – the stock was offering sustainable yield of >8% start of the year!).
Source: Bloomberg, Banyantree
Investment Manager / Director at BanyanTree Investment Group
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