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UK Election Implications

13/12/2019

As expected, the Conservative party appears to have won the UK general election, and thus will command a majority in Parliament. This now brings near certainty that the Withdrawal Agreement Bill will be passed in the next few weeks, and a “Brexit” will occur by the end of January.

In the near-term, we can expect an increase in the value of British pound, reflecting the increased clarity. While it has already rallied tremendously over the fourth quarter as the polls indicated the now confirmed election outcome, it is still at historically low levels (£1 = ca. $1.341) and remains undervalued versus the US dollar on most measures of purchasing power parity, a proxy for “fair value”. A move back towards “fair value” (ca. £1.45), would imply significant further upside.

However, let us remember that “Brexit” day at the end of January will signal just the beginning of negotiations surrounding the future relationship with the EU, not the end. Prime Minister Boris Johnson has insisted that Britain will leave the transition period just 11 months later, at the end of December 2020, with a permanent trading relationship in place with the EU. The next year may end up very like the last three, with much “noise” generated from negotiating deadlines and red lines and a clean break – or negotiated settlement – with the EU. A number of other important factors such as interest rates, inflation and general economic conditions will also impact currency movements. It is likely that Sterling volatility will persist – a sustained recovery towards “fair value” over 2020 is not our base case. Rather, we expect range-bound trading around the US$1.35-level, but as always, are humble about our – or anybody’s – ability to forecast FX with high conviction.

Our primary goal remains not to guess the direction of the currency based on unknowable future factors, but rather to ensure we are comfortable with risks to multi-asset, sterling referenced portfolios. In globally oriented strategies, sterling weakness will lead to positive performance, all else equal. Conversely, should sterling strengthen, a currency drag will occur; thus we “hedged” part of the non-Sterling exposure earlier in the year and may increase this should sterling fall notably.

However, barring currency positions, the election will not of itself impact our risk allocations; geopolitics tends to be a red herring, and thus best ignored for asset allocation purposes. Our investment process seeks to evaluate the long-term fundamentals rather than focus on short-term movements. It is deliberately long-term. It aims to eschew the “noise” which inevitably surrounds such events, and look to what we consider indelible, longstanding drivers of asset returns: economic cycle, valuation, momentum and sentiment. To the degree that geopolitical events impact the fundamentals, we pay attention. To the degree they do not, we remain positioned to take advantage of any excessively bearish sentiment by taking contrarian positions.

Over the coming weeks and months, the Kleinwort Hambros Investment Committee (KHIC) will consider if the new paradigm – where the UK moves towards full autonomy from the EU – has resulted, or will result, in a change to the underlying factors that underpin our expected future returns from various asset classes. For the moment, our portfolios remain well balanced, with diversified allocations to assets such as equities, fixed income, cash, commodities and low-volatility hedge funds.

 

1. As at 8:40am time on 13 December 2019
The value of investments can fall as well as rise. You may not get back what you originally invested.

 

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This document is issued by the following companies in the Kleinwort Hambros Group under the brand name Kleinwort Hambros 

United Kingdom 
SG Kleinwort Hambros Bank Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm reference number is 119250. The company is incorporated in England and Wales under number 964058 and its registered address is 5th Floor, 8 St James’s Square, London SW1Y 4JU.

SG Kleinwort Hambros Bank Limited is covered by the Financial Services Compensation Scheme ("FSCS"). The FSCS can pay compensation to eligible depositors or investors if a bank is unable to meet its financial obligations. Most depositors and investors – including most individuals and businesses – are covered by the scheme. In relation to investment services compensation will be payable, however, only in circumstances where we have been in default to you of our obligations. It will not be available merely because your  investments have not performed as well as you had expected unless we are somehow at fault.

For further information about the schemes (including the amounts covered and eligibility to claim) please contact your Private Banker or refer to the FSCS website: www.fscs.org.uk. 

Channel Islands
Please note the Channel Islands are not part of the UK and when you conduct business with SG Kleinwort Hambros Bank (CI) Limited you will not be eligible for: (a) the protections provided under the UK's Financial Services and Markets Act 2000 other than protections relating specifically to UK regulated mortgage business; or (b) referring complaints to the UK’s Financial Ombudsman Service. However SG Kleinwort Hambros Bank (CI) Limited’s UK regulated mortgage business is covered under the UK's Financial Services Compensation Scheme ("FSCS"). You may be entitled to compensation from the FSCS if SG Kleinwort Hambros Bank (CI) Limited cannot meet its obligations in relation to UK regulated mortgage business. This depends on the circumstances of the claim. For further information about the FSCS (including the amounts covered and eligibility to claim) please contact your Private Banker or refer to the FSCS website: www.fscs.org.uk.

The company (including the branch) is also authorised and regulated by the UK Financial Conduct Authority ("FCA") in respect of UK regulated mortgage business and its firm reference number is 310344. This document has not been authorised or reviewed
by the JFSC, GFSC or FCA. 

Gibraltar
SG Kleinwort Hambros Bank (Gibraltar) Limited is a participant in the Gibraltar Deposit Guarantee Scheme (the “Deposit Scheme”).
You may be entitled to compensation from the Deposit Scheme if we cannot meet our obligations. Most deposits denominated in currencies of the European Economic Area and Euros are covered. Further details of the Deposit Scheme are available on request or can be found at www.gdgb.gi. The Deposit Scheme does not apply to fiduciary deposits.
SG Kleinwort Hambros Bank (Gibraltar) Limited is authorised and regulated by the Gibraltar Financial Services Commission for the conduct of banking, investment and insurance mediation business. The company is incorporated in Gibraltar under number 01294 and its registered address is 32 Line Wall Road, Gibraltar.

General
Kleinwort Hambros is part of Societe Generale Private Banking, which is part of the wealth management arm of the Societe Generale Group. Societe Generale is a french bank authorised in France by the Autorité de Contrôle Prudentiel et de Resolution, located at 61, rue Taitbout, 75436 Paris Cedex 09 and under the prudential supervision of the European Central Bank. It is also authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

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