20 April 2018 · 5 min read

High equity valuations face macro headwinds

Factors behind record run of corporate profitability may be fading

We have had a cautious view on global equities for longer than has been comfortable. In truth, over the last 12 months this view has been 50% right at best. European markets, including the UK, have delivered relatively little capital growth. However the US and emerging markets have moved significantly higher. When the headlines are focussed on geopolitical events, it is also easy to lose sight of the anchor of equity valuations. We have updated our equity valuation measures and find that the US market in particular remains notably expensive while European markets still appear overvalued. We recognise that this has in part been justified by the record run of corporate profitability but the factors driving this phenomenon may now be going into reverse.

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16 April 2018 · 3 min read

2018 Earnings forecasts: Still robust, for now

Corporate sector soldiers on despite increasing geopolitical tensions

Geopolitics will in our view continue to present headline risk for the rest of the year. The US/China trade détente has broken apart as the US administration addresses the prospect of China challenging for dominance in the world economy. This weekend’s military response to the use of chemical weapons in both Salisbury, UK and Syria may for now be described as “mission accomplished” but it remains to be seen what the response would be to any further provocation. At the same time, there has been a run of disappointing economic data in the eurozone. Nevertheless, earnings estimates remain relatively stable for now in aggregate as the recent strength of the oil price leads to upgrades in energy, offset by modest downgrades in other sectors.

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23 March 2018 · 3 min read

Market declines: US LIBOR or US trade war?

Headlines scream trade war while a surge in US LIBOR is tightening US financial conditions

It is very easy to point the finger at US trade sanctions against China as a reason for the recent declines in equity markets. The prospect of a near-term confrontation, in respect of access to markets and IP protection (a free competition zone perhaps rather than a free trade area), is clearly unhelpful for global equity sentiment. China’s transition from a catch-up nation to an economic competitor always had to be resolved at some stage. However the second dynamic at work during Q1 18 is a rapid rise in US LIBOR, over and above that of official US interest rates. This is tightening monetary conditions rather faster than policymakers may have intended.

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20 March 2018 · 2 min read

Social Media’s Dieselgate?

The risks include fines, increased regulation and a change in consumer preferences

The recent controversy over social media and the use of its user data is likely to persist. Many users may not understand that researchers can accurately profile individuals on something as simple as their Facebook “likes”. The potential for influencing in subtle ways both consumption and more controversially political behaviours through targeted advertising should be clear. Multiple investigations across jurisdictions may now cast a harsh light on business practices which may otherwise have continued under the radar. Global digital titans which have become in effect brokers of user data are therefore under threat on another front, in addition to a recently proposed digital revenue tax.

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15 March 2018 · 2 min read

2018 Earnings forecasts: US stable, modest declines in Europe

Watch for ebbing economic momentum as survey data peaks

Despite the increase in equity market volatility, there has been little follow-through to economic fundamentals to date. US earnings forecasts have stabilised and are indicating mid-teens profits growth for 2018, of which approximately one-half appears to be due to US tax reform. US economic surprise also remains relatively strong. In Europe however, unweighted earnings estimates have continued to fall, if modestly, and perhaps more importantly here economic surprise indices have turned sharply lower. We view this as partly due to Brexit uncertainty in the UK and a rising EUR exchange rate in continental Europe.

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6 February 2018 · 3 min read

Volatility spike: Investors have only themselves to blame

The only mystery is why markets were so placid in the first place

Perhaps controversially, we view the intellectual horsepower being consumed by the legions of writers commenting on every second’s movement in markets over the last few days not dissimilar to the wasted electricity consumed to validate speculative bitcoin transactions. Both activities are in our view of relatively modest economic value, even if there is currently heightened demand. There have been, in a historical context, only modest declines from the highs for major stock markets, albeit concentrated in the stronger local currency year to date performers of the US and Japan. In volatile times, investors must remain focused on the long-term outlook.

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