Market update: Downbeat mood as China summit sparks more worry and UK political crisis rumbles on
Susannah Streeter, chief investment strategist, Wealth Club: “There’s a downbeat feel around at the end of the week as big problems crowd in, without resolutions in sight. London’s FTSE 100 is on the slide after falls in indices in Asia as geopolitical concerns collide with Westminster worries. There had been hopes that the US-China summit would be a catalyst for a breakthrough in the Iran standoff or in trade relations. However, the meeting between Xi Jinping and Donald Trump was big on warm words and symbolism but not outcomes. Instead of reassurance, the Chinese premier’s focus on Taiwan, warning missteps between the two superpowers could create clashes and conflicts, has caused nervousness about fresh geopolitical fractures looming. With diplomatic efforts aimed at resolving the Middle East conflict in limbo, fresh uncertainty has flooded in. Oil prices have risen further, with Brent crude trading above $107 a barrel, keeping inflationary concerns alight.
In the UK, the immediate shock of the political crisis has receded, but it’s still clinging on like a damp squib and weakening sentiment. With Andy Burnham, mayor of Manchester, attempting to barrel his way into Number 10 via a by-election, it’s set off another wave of worry about political instability. Sterling has dropped and UK borrowing costs are on the rise again. After receding yesterday 10-year gilt yields have marched higher, back above 5.1%. Burnham’s big hurdle of course is winning the by-election and so this leadership race looks set to be long and cumbersome. Another bout of political infighting, with yet another prime ministerial shuffle underway is hardly a good look for a country which needs to portray stability to attract investment.
The pound is feeling the pain, amid the pile-on of uncertainty about the UK’s political future. It’s weakened to trade around the lowest level in more than a month, at $1.33, and has also slipped against the euro. This fall in sterling is set to make British companies more attractive takeover targets. Already, plenty of UK-listed firms are considered to be vulnerable, given the valuation gap relative to the US and, to some extent, European peers. This cracked open after Brexit and risks widening further, amid the unpredictability. There’s a raft of bids currently on the table for prime parts of the market, in particular Tate and Lyle, which is currently considering a £2.7bn offer from Illinois-based Ingredion. If volatility spirals out into further pressure on UK-listed firms, particularly in the mid-cap space, it could spur on another raft of deal-making.
This may prompt a switch in focus for investors into opportunities in the private market. With more companies being snapped up by bigger players, and growing firms staying private for longer before even entering the public space, private markets are where prospects look increasingly more interesting.
Some of the brightest stars spend years being private and may never go through a conventional stock market listing. Of the 159,000 companies globally that generate more than $100m in revenues, just 19,000 are listed. With more companies staying private for longer, individual investors now have a greater opportunity to share in their success.
Diversification is, as always, crucial. Liquidity in private markets is constrained, valuations can be less transparent and there’s always a risk of arriving late to a cycle that institutional money has already benefited from. So, with more complexity comes more risk, but with the number of listed companies shrinking, the recent opening up of private market opportunities to more retail investors does offer greater choice and opportunity.”