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Investment Insights: Is the U.K. the next Singapore?

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

Traffic scene on London street at sunset, with Big Ben a short distance away.At first glance, the U.K. and Singapore may not seem to have much in common, other than a history with the British Empire. However, both do show some commonalities. Both countries rank among the highest in human development according to the United Nations, boast per capita GDP in the top 15 nations in the world based on data from the World Bank – and both are in the process of establishing trade deals with the European Union.

While it hasn’t seen the same tabloid excitement as the Brexit, the EU-Singapore Free Trade Agreement has been in the works for over a decade. After negotiations between the EU and ASEAN, the Association of Southeast Asian Nations, fell apart in 2007, the EU and Singapore launched into direct talks culminating in an agreement in 2014 that has yet to be enacted. A key development – and what may set the precedent for Brexit dealings – was a ruling from the European Court of Justice released this month that gave the legal opinion that all 28 member states of the EU must give parliamentary approval in order for the full deal to be final. The court verdict was specifically in respect to two aspects of the trade deal regarding dispute settlement and non-direct foreign investment. The court validated that the European Commission would still negotiate trade deals on behalf of member states, but may not have “exclusive competence” over other provisions included in the agreements that do not specifically involve trade.

The new verdict will have a decisive impact on the terms of Brexit. Negotiations have begun to heat up with the U.K. making threats to “walk away” from discussions unless the European Union drops their demand for a €100 billion payment for leaving the currency bloc. Additional conflict has risen over rights of EU citizens within the U.K. and immigration as key issues. Given that the negotiation process will review a multitude of different facets outside of just trade, the EU-Singapore judgment may have laid out a minefield instead of a roadmap for Brexit debates. A possible scenario, one which would be a significant obstacle for the U.K., would be the requirement of endorsement by each national and regional assembly within the EU – that could mean 38 different parliamentary approvals would be needed to finalize Brexit terms.

From an investor’s perspective, we view European markets as a significant opportunity based on potential risk and return, and other investors seem to agree. Data from Bloomberg shows net inflows to Eurozone and European Union ETFs at $10.4 billion and $5.8 billion, respectively, over the last 3 months, bested only by the United States. Why the increased interest in the European region? For starters, geopolitical risk has for the most part abated, ECB monetary policy remains very, very accommodative, the unemployment rate is the best since June of 2009, certain valuation points remain lower relative to U.S. markets, and overall economic data has been steadily improving. Our strategies have benefited from our allocations to developed foreign markets, particularly Europe, and even more so when including our euro-hedged positions. We will continue to monitor the situation in Europe as the first round of official Brexit talks is set to take place June 19, but for now, European stocks seem attractive given the fundamental drivers and relative valuations.

Chart showing various market returns as of 5/30/17

Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

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