Economy showing resilience against the odds

Kristin Scott Thomas, above, as Clementine and Gary Oldman as Churchill. 'Pictures: PA Photo/Universal Pictures International/Focus Features/Jack English.
Kristin Scott Thomas, above, as Clementine and Gary Oldman as Churchill. 'Pictures: PA Photo/Universal Pictures International/Focus Features/Jack English.
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Some of our team have recently appreciated The Darkest Hour, which has been receiving rave reviews at the box office.

Regardless of personal opinion, it does strike this particular viewer how little has changed in the field of politics.

Even when the country was approaching the nadir of a potential Nazi invasion, there were still factions plotting and scheming with only their self-interest foremost in their minds.

Back then, a few rousing speeches from the new leader went a long way to unifying the war strategy from parliament. In some ways, this provides comfort and helps put the endless current disunity of Parliament in perspective regarding a rather less violent exit from Europe.

However, as round two of the Brexit negotiations kicks off, there is little unity of purpose and direction.

None of this is terribly influential for assessing immediate prospects for the UK equity market as clarity is likely to be further delayed.

However, there is something going on in the currency markets which is worthy of assessment. We are all aware of the significant collapse in sterling immediately after the Brexit vote in 2016.

To put this in context, the weakest point at the time was achieved on 11 October 2016 when it became apparent that there wasn’t much of a Brexit plan after almost four months. At this point, sterling had weakened by 24​ per cent​ against the yen, 21.5​ per cent​ against the US dollar and 18.4​ per cent​ against the euro.

However, all was not lost because the FTSE-100 had rallied by 12.7​ per cent​ over this period whilst the Mid-250 had risen by 5.2​ per cent​. Overseas equities had risen by 24.3​ per cent​ in sterling terms, but only 3.1​ per cent​ in local currency.

​I​f ever there was an argument for internationally diversified equity exposure, this is it. Also, taking an overtly negative view on UK equities and moving into non-sterling assets at the same time would have cost you dear. It often pays not to take extreme and definitive positions in uncertain times.

​​Since then, overseas equities have outperformed as the prospects for UK equities have looked inferior to the overseas investor, held back by a perceived Brexit discount. To put this in context, overseas equities in their local currencies have collectively returned 34.6​ per cent​ whilst the FTSE-100 has returned 13.6​ per cent​ and the FTSE-250 17.9​ per cent​.

So again, having a foot in both camps was vital to benefit from this polarised return profile. Unfortunately, once the overseas returns are translated into sterling, they are reduced to 18.7​ per cent​. Still a superior return but nowhere near as good as a currency-hedged approach assuming perfect foresight as to how sterling was likely to perform.

There was also a second and weaker point for sterling against the euro in late August 2017 following the disastrous Tory election outcome.

However, against the yen and US dollar, sterling has steadily regained its poise since October 2016 and now stands just 1.7​ per cent​ weaker against the yen and 4.8​ per cent​ weaker against the US dollar whilst against the Euro sterling remains 14.6​ per cent​ weaker.

It is the US dollar that has shown the biggest move in 2018, falling by almost 5​ per cent​ in the last two weeks, as highlighted at the Davos gathering last week, where there appeared to be a shift of emphasis from the White House.

Whatever is going on, we can say that, generally, sterling has been strengthening as the UK economy has been resilient against the odds. This is supportive of UK equities but more for unloved domestics than euphorically supported US dollar earners.

As this bull market in overseas equities, bonds and all other asset classes continues, a reversal in the fortunes of sterling and the fact that UK equities have been one of the poorer performers on a relative basis will serve us well if there is any significant correction. We can recall how European equities rose to the top of the tables when the Eurozone implosion shadow was removed as Greece left the headlines.

Perhaps we will see the same as the Brexit discount begins to unwind and more economic certainty returns.

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