Fund Management Diary

Transcription

1 Fund Management Diary Meeting held on 27 th March 2018 Brexit negotiations can move onto trade The European Union Council has endorsed a transition period that will last until the end of 2020 Discussions on the future trading relationship most likely a Canada-style free trade agreement can begin now But the key stumbling block remains the incompatibility of an open border between Ireland and Northern Ireland with the United Kingdom s exit from the Customs Union Transition deal agreement is a welcome development As expected, the European Union Council endorsed a transition period last Friday (23 March). The latest draft of the European Union s Withdrawal Agreement was colour-coded to show where agreement has been reached (green), where agreement is close (yellow) and where little progress has been made (white). The working document revealed that the two sides have reached complete agreement on the terms of the transition period, with that entire section highlighted in green. This should provide some reassurance for United Kingdom businesses that trading arrangements with the European Union are unlikely to change until the end of During the transition period, the United Kingdom will be prohibited from participating in the European Union s decision making processes, or becoming bound by new trade deals (although it may still be able to negotiate and sign them). And European Union citizens who come to the United Kingdom during the transition period (29 March 2019 to 31 December 2020) will have the right to permanent residence. Discussions on the future trading relationship can now begin Importantly, the Council also agreed that enough progress has been made to open discussions on the future trading relationship. As such, the European Union formally adopted a new set of guidelines, which will inform its stance in the next stage of negotiations. The European Union sees a Canada-style free trade agreement as the best possible trading arrangement consistent with the United Kingdom s red lines of leaving the Single Market and Customs Union. This would ensure zero tariffs on trade in goods between the United Kingdom and the European Union. It would also see the United Kingdom being free to set its own tariffs on imports from the rest of the world and to determine its own rules and regulations. However, such an agreement would necessitate customs checks and controls. Moreover, even with these controls and checks in place, the guidelines noted that the European Union needs guarantees that the United Kingdom will not seek to gain a competitive advantage through deregulation. To facilitate this, the European Union made a rare concession, softening its stance to allow the United Kingdom to retain associate membership of European Union agencies and bodies (albeit without any influence on any European Union decision-making processes). This would make it easier for British firms to receive regulatory approval and European Union market access after Brexit.

2 Overall, the customs checks and controls will lead to some increase in trade frictions, which could result in some reduction in trade with the European Union in the short term. However, given the geographical proximity, and the United Kingdom s willingness to align on rules and regulations relating to goods in particular, non-tariff barriers may not be quite as large as between Canada and the European Union. But the Northern Ireland border issue remains unresolved The key stumbling block in the negotiations remains the incompatibility of an open border between Ireland and Northern Ireland with the United Kingdom s exit from the Customs Union; an open border is a European Union condition and a political imperative for the United Kingdom. The United Kingdom and the European Union will have six meetings through to the end of April in a bid to work out solutions. However, it is widely accepted that the technology based solutions that the United Kingdom has previously proposed would be inadequate to ensure that the European Union s customs rules were followed. The United Kingdom has now accepted the Northern Ireland backstop option in principle, which means that in the absence of solutions, under the terms of the Withdrawal Agreement, Northern Ireland would remain within the Customs Union. However, the colour-coded draft of the Withdrawal Agreement showed that little progress has been made towards agreeing the detail of the arrangement, or the role of the European Court of Justice in enforcing the Withdrawal Agreement. As such, given the European Union s motto that nothing is agreed until everything is agreed, there is still a tail risk that the Withdrawal Agreement, including the provision of a transition period, falls apart. Capital Economics thinks that it is more likely that the Northern Ireland issue gets kicked further down the road. Although the European Union Council will review progress on the Irish border issue in June and there is a deadline to finalise the Withdrawal Agreement in October, the possibility that the future relationship can supersede the backstop option means that the United Kingdom could enter the transition period without a clear solution. Given that Northern Ireland would remain in a Customs Union with the European Union, and, were the government to maintain its commitment to avoiding a customs border in the Irish Sea, the rest of the United Kingdom as well, such an agreement would face stiff opposition from eurosceptics in parliament. That said, it seems that the weight of opinion in parliament is shifting towards a softer form of Brexit. There is a material chance that the government will be defeated on an amendment to the Trade Bill, which would keep the United Kingdom in a Customs Union with the European Union. Brussels new guidelines indicated that it would welcome such a development, stating that it would be prepared to reconsider its offer if the British position evolved. Overall, while the European Union Council s decision keeps negotiations moving forward, the key questions that will determine the United Kingdom s future relationship with the European Union are yet to be answered. *This diary has been written in conjunction with Capital Economics.

3 Strategy The transition period that has been agreed between the UK and the EU is in line with Margetts expectations for Brexit, which we think will be a long and relatively slow process. This news has had limited impact on markets, however equity markets have been quite volatile over the last month or so. We believe this is largely to do with the trade tariffs that the US is imposing on China and the ensuing trade war rhetoric. We expect tensions around trade tariffs to reduce gradually and whilst we are mindful of the current volatility, we do not feel overly worried. We think there has been a fall in some peripheral asset classes, such as cryptocurrency, which has led to a sell-off in wider equity markets as investors adjust their portfolios to account for the losses from peripheral areas of their portfolios. It is our belief that this acute selling pressure will subside and we will see a short term recovery in equity markets. We also believe the market volatility has led to a shake-up in which growth assets, which have been favoured over recent years, may fall out of favour as income providing stocks with more of a value bias are seen as safer investments to hold through volatility.

4 Fund Comments The below charts show the current positions of the fund, the tactical (short term) targets, and the strategic (long term) targets of the fund. We aim to keep the current positions in line with the tactical targets from week to week. The differences between the tactical and strategic targets reflect the views and convictions of the Margetts Investment Committee. Providence 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Bonds Cash UK Europe ex UK North American Asia Pacific ex Japan Emerging Markets Japanese Global Current Position Tactical Targets Strategic Targets Asset Allocation: The above chart, as of 23/03/2018, demonstrates the fund s current asset allocation and the tactical targets set by the committee. No changes are being made to the current allocation or tactical targets this week. Fund Selection: The Premier Income fund has lagged the IA UK Equity Income sector over recent weeks, while the Royal London Global Index Linked bond fund has performed strongly over the last 12 weeks. The team are still looking to replace Schroder UK Alpha Income, but are considering the timing of the swap carefully given the recent market volatility.

5 Select 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Bonds Cash UK Europe ex UK North American Asia Pacific ex Japan Emerging Markets Japanese Global Current Position Tactical Targets Strategic Targets Asset Allocation: The above chart, as of 23/03/2018, demonstrates the fund s current asset allocation and the tactical targets set by the committee. No changes are being made to the current allocation or tactical targets this week. Fund Selection: The Schroder Asian Income fund has outperformed the IA Asia Pacific ex Japan sector this week, this is potentially due to the fund s relatively small allocation to China which has struggled over the last week. The SVM UK Growth fund has been somewhat weaker over 2 weeks, however the long term performance of this fund is strong.

6 International 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Bonds Cash UK Europe ex UK North American Asia Pacific ex Japan Emerging Markets Japanese Global Current Position Tactical Targets Strategic Targets Asset Allocation: The above chart, as of 23/03/2018, demonstrates the fund s current asset allocation and the tactical targets set by the committee. No changes are being made to the current allocation or tactical targets this week. Fund Selection: The Standard Life Global Emerging Markets Income fund has performed strongly over the last month, while the JPM Europe Dynamic ex UK fund has lagged over the same time period. There are no changes to the underlying holdings being considered at present.

7 Venture 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Bonds Cash UK Europe ex UK North American Asia Pacific ex Japan Emerging Markets Japanese Global Current Position Tactical Targets Strategic Targets Asset Allocation: The above chart, as of 23/03/2018, demonstrates the fund s current asset allocation and the tactical targets set by the committee. No changes are being made to the current allocation or tactical targets this week. Fund Selection: The Invesco Perpetual Asian fund has performed well recently and has been the strongest Asia Pacific holding over 1 week. The F&C European Growth & Income fund has underperformed over the last few weeks but the team remain comfortable with this fund and are not planning any changes in this portfolio.

8 Important Information Please note that the contents are based on the author s opinion and are not intended as investment advice. This information is aimed at professional advisers and should not be relied upon by any other persons. Any research is for information only, does not constitute financial advice or necessarily reflect the views of the author and is subject to change. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the fund is suitable and appropriate for their customer. Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise and investors may get back less than they invested. Important information about the funds can be found in the Supplementary Information Document and NURS-KII Document which are available on our website or on request. Issued by Margetts Fund Management Ltd Margetts Fund Management Limited is authorised and regulated by the Financial Conduct Authority For any information about the company or for a copy of the company's Terms of Business, please contact the company on or at 1 Sovereign Court, Graham Street, Birmingham B1 3JR You can us at admin@margetts.com