At this time of year, it’s perfectly normal to spend more time worrying about what you’re going to get everyone for Christmas than about the outlook for stock markets. What do you buy the father who has everything he needs?
What about the sister who “needs” almost everything that graces the shelves of department stores? And how about the mother who really just wants to spend a bit of extra time with her children?
Block out the background
With such a huge range of options to choose from, picking the perfect one can often feel like an impossible task. Of course, the good news is that most recipients will feel just the same about you, even if panic drives you to buy the usual seven-pack of socks that gets filed straight in the back of the bedroom drawer.
Amid all the festive chaos, screening out the noise can help to sharpen your focus on what really matters. The stock markets are no different, so here are three key things for equity investors to watch out for between now and the end of the year.
First, keep a close eye on the Brexit negotiations. It goes without saying thatthe clock is ticking, and if we don’t see tangible progress towards a transitionaldeal by the end of the year, markets maystart to price an increased probability of a“no deal” Brexit.
In the event that this happens, the pound could fall further, causing companies that derive most of their revenues from abroad to outperform those that are more domestically focused. These are generally the FTSE 100 companies, which source nearly 70 per cent of their revenues from outside the UK.
Likewise, if the market gets any reason to price a greater probability of a change in prime minister, that could also have a significant impact on the currency.
Against a politically uncertain backdrop,it probably makes sense not to have a very large exposure to the most domestically focused UK companies, which are generally found in the mid- and small-cap part of the market.
Unfortunately, most UK equity funds currently have a very big bet on these mid- and small-cap companies relative to the FTSE All-Share Index.
Second, watch the housing market data like a hawk, particularly in London. The Royal Institute of Chartered Surveyors survey tells us that London estate agents have not been this gloomy about the outlook since the global financial crisis. If house prices were to start falling, that would be a concern for the economy. This means that caution may be warranted when it comes to those house-builders that are most exposed to the high end of the London property market.
And third, watch consumer confidence and the labour market. Typically, when the unemployment rate is falling and consumer confidence is rising, equity markets tend to perform well. In the US and Europe, consumer confidence is at its highest level in more than 15 years and unemployment is falling fast. Unless consumer confidence falls sharply in these economies, or there is a rise in joblessness, US and European equities should remain well supported.
Broaden your exposure
In the UK, despite low unemployment, consumer confidence has been falling. This can mostly be attributed to a fall in real wages, because inflation has shot upwards to 3 per cent this year. This provides another reason as to why investors should consider broadening their equity exposure beyond the UK market alone.
As the trees go up, the lights are ceremoniously lit and the aroma of mulled wine starts wafting through the air, remember to keep your focus firmly on the real market movers and screen out that background noise as effectively as you do the Christmas jingles.
Nandini Ramakrishnan is a global market strategist at JP Morgan Asset Management
