Euro games – the effect of geopolitics on investing today

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Global politics is currently very interesting and notwithstanding the situation here at home, it is timely to take stock of the underlying market situation for investing in the UK and Europe.

Brexit has increased global market uncertainty and accordingly risk

What is key to consider now is whether in the short-to-medium term that the UK can fund its large current account deficit. To date, the Bank of England’s assurances about liquidity seems to have convinced the market that it can. It is important to note that any doubts about the deficit will likely hurt the residential property market and likewise the UK’s ability to grow over the next couple of years.

The residential property market is crucial to the UK situation

There are signs—such as compressed yields and stretched housing-to-income serviceability—that UK property is expensive. Notwithstanding these, there is definitely international interest being generated specifically in the London property market by the fall in the sterling, which continues to be under pressure, hitting new 30-year lows against the US dollar. UK property, both residential and commercial, looks expensive on some measures and seven UK real estate funds have frozen redemptions since Brexit as investors head for the door. This and other factors could place downward pressure on prices and may result in opportunities in specific London market segments, but the case is not obvious yet.

Meanwhile in Europe, the outlook is even less stable and less certain

In Europe, the story pre-Brexit was one of softening outlook and weak trade numbers and credit growth, despite the best efforts of the European Central Bank. Add to this the political shock of Brexit and the European outlook is even less stable and less certain. From our perspective, we remain very cautious about opportunistic calls to invest in the UK or Europe. Yes, the sterling looks attractive on a long-term view against the US dollar, but against the Australian dollar it is less compelling. The UK and European stock markets have recovered remarkably quickly from their Brexit woes, however nothing in the region has changed to ease our nervousness. For example, Italy appears to be using Brexit to go against the EU rules in order to bail out its banking sector as an attempt to pacify voters prior to their own referendum in September. Spain also has not solved its own political woes.

Anti-establishment voting is becoming the norm

We have noticed a developed world syndrome that is gathering pace – anti-establishment voting. Discontent with the uneven wealth effects of central bank monetary experimentation, high unemployment, low wage growth, youth indebtedness and the refugee crises are all impacting election results and referendums from Australia to the US. Geopolitics is a risk factor markets find very hard to price. In the face of this we maintain a cautious view of the world right now.

Any strategies or recommendations are general in nature and do not take into account your objectives, financial situation or needs. As always, your personal circumstances are critical when considering any financial strategy and seeking professional personal advice is highly recommended.
 

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Patrick Broughton

Investment Committee Chairman

With 25 years’ global investment banking experience in a broad range of financial markets, including equities, fixed income, hybrids and convertibles and foreign exchange, Patrick Broughton is charged with chairing the Dixon Advisory Investment Committee.

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