Edison Strategy

Edison’s corporate strategy research is designed to keep senior management aware of recent economic developments and capital market activity through regular written updates, webcasts and face-to-face meetings.


Alastair George

Alastair George

Strategic Insight blogMore

Earnings: The real Trump bump

Analysts’ profits forecasts have edged modestly higher in the first month of the year in continental Europe and the UK, as would be expected during a period of above-consensus global economic data. In the US however, tax reform has added to the cyclical economic strength, pushing median 2018 profits forecasts dramatically higher, up 4% over the past month alone. This represents 2/3rds of our total expected benefit to US earnings from tax reform. Earnings revisions data supports our strategic view of strong momentum carrying over into Q1/Q2 2018. However we also note that economic surprise indices may have peaked in January and combined with forecast rate increases, markets may yet tread water as the year progresses.


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Equity strategy and market outlook January 2018
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In this month’s strategy piece, Alastair George believes that 2018 is likely to be a year of two halves for global equity markets. Initially, strong economic momentum and investor sentiment is likely to prevail over the negatives of high valuations and continued monetary tightening. However, the delayed impact of tighter policy in 2017 and further tightening in 2018 appears to be a strong headwind to further equity performance from mid-year. He notes that output gaps in developed markets have now closed, in aggregate, for the first time since 2009. This is a structural change from the slack environment which persisted following the financial crisis of 2008-09 and investors should therefore consider sector allocations carefully. In his view, equity portfolios should now be tilted towards sectors which have offered a degree of resilience and a better risk/reward in the past. Specific growth or event-driven situations should also be favoured over broad market exposure, as developed market price/book valuations as a whole remain unappealing.
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Equity strategy and market outlook November 2017
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In this month’s strategy piece, Alastair George believes that, in hindsight, we have been over-cautious in our strategic views during 2017 as equity market performance has been strong, despite the starting point of extended valuation multiples and progressively tighter monetary policy in the US at least. However, even a cautious strategy would have generated returns significantly above cash during the year. While we take no view on the outlook for the bitcoin price due to its speculative nature, we do see the coalescing of a significant amount of capital and infrastructure around blockchain technologies as a very important development. There are potentially disruptive implications for the conventional finance sector over the medium term as there is now an established network effect within the digital finance community. For the traditional finance industry, the risk is that the genie is already out of the bottle. There is no change to our strategic view as we continue to believe a cautious outlook is warranted for developed markets on the basis of valuations. However, recent economic surprise is increasingly positive and credit conditions are loose. Therefore a major fracture in markets in the near term remains unlikely in our view. We continue to believe that, as we may be late in the cycle, investors should combine a relatively modest level of market exposure with only carefully selected equities.
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Equity strategy and market outlook October 2017
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In this month’s strategy piece, Alastair George believes that 2018 brings into view the prospect of a net decrease in central banks’ balance sheets, and that the winding down of policies that were statistically shown to depress risk premia in fixed income and credit markets should not be ignored. The US Fed has offered ample guidance in terms of balance sheet reduction, but the surprise may be on the other side of the Atlantic as economic activity has rebounded strongly in the eurozone, yet interest rates remain negative and the ECB risks getting behind the curve. During 2017, markets have pushed further into their low-volatility/low-return regime. Volatility has declined faster and further than at any time since the 1970s. We view this as a temporary phenomenon likely to reverse as volatility returns to interest rate markets during 2018. We maintain a cautious outlook for the medium term on the basis of valuations that indicate very low expected returns in both equities and credit in developed markets. To deliver returns, active investors may need to combine a relatively modest level of market exposure with carefully selected exposure to specific company- or event-driven situations.
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Equity strategy and market outlook September 2017
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In this month’s strategy piece, Alastair George believes resilient forecasts for profits growth in 2017 keep the equity bears at bay in the short term. Though a modest degree of weakness in consensus earnings forecasts has appeared recently, earnings growth for developed markets is still forecast to be close to 10% in 2017. However, valuations across credit and equity markets highlight the need for caution for the medium term. Risk premia remain, in our view, compressed by central bank policy and are at levels that are unusually low on a historical basis. For the euro, it is perhaps a Goldilocks era as the strength of the currency taps the brakes on exporting nations, allowing other eurozone members, where there is less inflationary pressure, to remain beneficiaries of ultra-loose monetary policy for longer. We expect the ECB to aim to maintain the euro close to current levels. We continue to believe portfolios should be cautiously positioned.
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Equity strategy and market outlook August 2017
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In this month’s strategy piece, Alastair George believes that the record levels of corporate profitability observed since the financial crisis are the key drivers behind currently high equity valuations. At the same time, the labour share of GDP has been declining as wage growth remains muted. In part, this profitability phenomenon is structural, due to factors such as globalisation and declining union power. Shorter-term cyclical factors such as high developed-market unemployment levels are also important. The benefits from structural factors are now largely in the rear-view mirror and furthermore US cyclical wage pressure appears to be on the increase. He therefore believes profit forecasts are unlikely to surprise to the upside and remains cautious on developed market equities.