Article 50 – views from the European Equities team
- Europe has proven remarkably resistant to global macro-economic turbulence and its recovery is hard to derail
- Rising radical politics in some European countries does not necessarily mean radical governments in power
Britain’s pre-announced, long-anticipated decision to trigger Article 50 and formally start the Brexit process has come as a surprise to nobody. Judging by the market’s reaction so far, it has been a non-event.
The focus now shifts to the negotiation phase. Over the next two years, observers and market participants will be searching for hints and looking for clues about the nature of the relationship between the UK and the European Union (EU).
Markets do not like uncertainty, so some volatility could be expected on either side of the Channel during negotiations, as contentious topics are tackled.
The views we held at the time of the referendum result last year remain true today.
From an economic perspective, we expect a continuation of the Eurozone recovery, underpinned by an accommodative monetary policy, less austerity, a more favourable FX rate and some structural reforms.
Europe has proven remarkably resistant to global macro-economic turbulence and its recovery, being largely driven by domestic demand, is hard to derail.
The European Central Bank also remains ready to act and able to counter any near-term pressures caused. Therefore, we see less risk of lasting damage to the rest of Europe from the Brexit process.
On the political front, we think it is too simplistic to assume that a Brexit-type vote is easily replicable in Continental Europe. The recent Dutch election is a very good example, where the pro-EU and right-of-centre VVD party won the largest number of seats in the lower house, and a number of other mainstream pro-European parties of various political hues did well. Geert Wilders’ anti- EU and far-right PVV failed to make a meaningful breakthrough.
Rising radical politics in some European countries does not necessarily mean radical governments in power. The mechanisms by which radical parties can actually turn into fully‑fledged governments, call and implement referenda to exit the EU are often just not there. There are significant legal and political hurdles in each country which make referendum risk much smaller than in the minds of many people.
As we go through the European electoral season and as the political landscape becomes clearer, the political risk premium on Europe should fade in our view, raising new investment opportunities for active stock-pickers to exploit. The more potent driver to long-term equity market returns is not politics, but rather, economic and corporate fundamentals – and to us these look refreshingly sound.
Article 50 – views from the UK Equities team
- We have a dynamic economy which is primed to adapt to whatever change is thrown at us
- Political events in the US and Europe have added an additional twist to the outlook for major global currencies
As the UK government begins its formal Brexit negotiations with EU members, we remain optimistic about the road ahead. We have a dynamic economy which has adapted to change before – and is now primed to adapt again to whatever change is thrown at us.
Sterling will remain a key instrument to watch over the near-term, as movements in currency will continue to impact the extent of the wider market response.
Political events in the United States and Europe have added an additional twist to the outlook for major global currencies, and we have observed the market thinking more carefully about currency implications.
Ultimately, we don’t manage money on a three-month view or a six-month view but in the best long-term interests of our clients. We would urge investors to recognise that we will endeavour to make considered judgments on the basis of the facts as they emerge. We will not be making changes to the methodology we have used for many, many years to build our portfolios, nor departing from the processes we deploy to analyse, understand and respond to investment opportunities across UK equity markets.