Weekly View - Turn to the left
As election day fast approaches in the UK, polls are showing the incumbent Conservative party in the lead. The prospect of a victory for Team Boris has been supportive of the pound, as market participants appear more anxious over the prospect of a Labour administration under Corbyn than a no-deal Brexit. UK equities also stand to benefit from a Johnson win.
Elsewhere in Europe, Germany’s Social Democrats (SPD) chose a new leadership team on Saturday in a surprise swing to the left. While this may impact the stability of the current government, it could – along with the recently announced auto sector layoffs – add pressure on Merkel to increase fiscal easing. The SPD will officially take position on the current coalition after its congress This Friday. As global economic growth continues to slow next year and central banks run out of supportive options, looser fiscal policy will be key to extending the current cycle. We had some good news in data last week, with supportive euro-area numbers and stronger-than-expected Swiss GDP growth. Last week was also an active one in merger and acquisition activity, including deals with industry leaders like Charles Schwab, Novartis and LVMH buying their rivals, a positive for event-driven and private equity funds, two asset classes we are positive on. All in all, this rather good news should continue to support current market and valuation levels, but we remain vigilant about potential complacency given the current volatility level remains suppressed and could easily spike.
The consequences of Trump’s ratification of the Hong Kong Human Rights Democracy bill remain to be seen. While Beijing was quick to condemn the US president’s decision and threaten countermeasures, no action to these effects have yet been taken. If China does not retaliate much – or only at the individual level – the chances that part of September’s tariffs are reverted will rise. Along with positive economic data, such an outcome would be good for Asian equities, which is our investment preference within the emerging market equity space. This week we will be watching for Friday’s employment figures as a health check on the US economy.