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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.

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Alastair George

Alastair George
Strategist


Strategic Insight blogMore

2019 Earnings forecasts softening

In recent consensus earnings revisions, we see a modest acceleration of downgrades to 2019 UK and continental European profits forecasts which have been drifting lower since August. In contrast, US forecasts have been revised only fractionally lower. The real action is in emerging markets, where 2019 forecast profits growth has fallen from 15% as recently as August to only 11% today. Finally we note that the typical upward trends in analysts’ target prices has stalled during 2018. This in our view confirms our top-down perspective that higher interest rates have been feeding through to company valuations, even as profits continue to grow.

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25/10/2018
Equity strategy and market outlook - October 2018
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In this month’s strategy piece, Alastair George believes that global equity declines during October have had no clear trigger and therefore there is no clear path for a rapid recovery. Having considered the modest moves in other asset classes and the absence of credit stress, we view the global equity declines as a continuation of an ongoing de-rating process, as US monetary policy is normalised. We can understand that value investors might remain frustrated as there has been no sense of capitulation, nor obvious bargains at the market level. Fundamental risks remain in place as the US administration shows no indication of backing away from its trade confrontation with China. The UK’s Brexit negotiations remain unresolved while the EU has in recent days rejected Italy’s proposed budget. Finally, US Fed policymakers remain on the hawkish side of prior market and our expectations. We retain a cautious position on developed market equities. Although the valuation risks have certainly diminished in continental Europe and the UK, US markets still appear very highly valued in a historical context. Investors looking to take advantage of recent market volatility may find opportunities in specific situations where poor liquidity has led to disproportionate price falls. However, for the broader market, we believe the most likely scenario is that the de-rating process will continue, with profits growing while equities underperform traditional hurdles of 7-8% annual return.
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27/09/2018
Equity strategy and market outlook - September 2018
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In this month’s strategy piece, Alastair George believes that as investors turn to 2019, trade, populism and geopolitics will remain drivers of market volatility. However, the evidence from the US over the last 12 months shows that it is possible to gradually allow interest rates to rise without having adverse effects on financial markets or a reversal in the economy. With a stronger US dollar, emerging markets have underperformed but we have not yet seen the declines in earnings estimates or tightening of EM financial conditions which suggest a widespread crisis is around the corner. Ten years on from the global financial crisis, the unfortunate legacy may have been to transform a quantifiable private sector economic challenge into a much less well understood popular political movement on both sides of the Atlantic. In some respects the rise of the Brexit movement and the UK’s resulting political difficulties is just one example. We expect a Brexit risk premium to remain in place for UK assets until the political uncertainty has diminished. We retain a cautious position on developed market equities, due in our view to a continuation of the benign derating regime as profits grow while markets underperform traditional hurdle rates for equity investment of around 7-8% pa.
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30/08/2018
Equity strategy and market outlook - August 2018
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In this month’s strategy piece, Alastair George takes heart from Fed chair Powell’s most recent comments indicating a preference for having a bias towards a wait-and-see approach to monetary policy. This is, in some respects, forward guidance on what happens after the currently priced-in Fed rate hikes have been implemented. As a result, the upward pressure has eased on the dollar and it is now, in our view, time to look again at EM equities. Emerging equities have underperformed so far this year but consensus forecast earnings growth both this year and in 2019 is well above developed market peers. Furthermore, valuations for EMs, while not inexpensive, are no higher than historical averages compared to relatively expensive developed markets. It is early days, but the apparently improved US trade relations with NAFTA members and the EU is also likely to lead to improved growth sentiment, if sustained. For bonds, a more dovish Fed may create upward pressure on US 10-year bond yields, steepening the yield curve. We believe US 10-year yields remain too low at under 3%.
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*Multiple Sectors

26/07/2018
Equity strategy and market outlook - July 2018
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In this month’s strategy piece, Alastair George believes that global equity markets remain in a period of consolidation while US interest policy is normalised even as corporate performance remains strong. Furthermore, US bond yields still appear too low given the prospect of increased issuance, a reduction in the Fed’s balance sheet and strong US growth. In respect of the US trade war, we believe the recent comments on monetary policy and announcement of additional subsidies for US agriculture underscore the resolve and political incentive for the current US administration to maintain a confrontational stance with respect to China despite the positive recent EU/US announcement. We remain cautiously positioned on equities.
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28/06/2018
Equity strategy and market outlook - June 2018
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In this month’s strategy piece, Alastair George believes that the US vs rest of the world trade confrontation is becoming the dominant narrative. We cannot rule out at this point that negative responses in financial markets may be a prerequisite to negotiating a face-saving route out of the situation for all sides. However, earnings estimates show few signs of the impact of tariffs or disappointing UK and eurozone economic data and robust growth for 2018 remains the consensus forecast. Profits forecasts have even risen in the US in recent months and the median US company is now expected to deliver close to 20% earnings growth in 2018. However, offsetting the benefits of strong US profits growth is the prospect of tighter US monetary policy and larger fiscal deficits. The recent trade protectionism-related flight to safety is understandable but in our view current US 10-year Treasury yields still appear too low. Emerging markets may continue to struggle as the Fed remains focused on US domestic condition. There is no change to our cautious outlook. We continue to believe developed equity markets are in a period of consolidation. Valuations are moving closer towards long-run averages with markets simply trading sideways as profits grow while monetary policy is normalised.