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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

FOMC Minutes: Up to speed with events but US-centric

The minutes of December’s FOMC interest rate meeting suggest the US Federal Reserve is in fact more attuned to the recent tightening of financial conditions and risk of a slowdown than first thought. Tweaks to the language in the FOMC’s December statement were intended to emphasise the data-dependency of the Fed’s monetary policy stance and also that only limited policy tightening was now envisaged. While we view this as reassuring for the remainder of 2019, the heightened volatility of global markets following Fed Chair Powell’s press conference demonstrates the ease of a miscommunication when interest rate policy becomes politically charged.

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17/01/2019
Equity strategy and market outlook - January 2019
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In this month’s strategy piece, Alastair George believes that investors should avoid the temptation to sit back and spectate in Q119 as a prudent degree of risk-taking may be a better strategy. Valuations now offer a more attractive entry point for both developed and emerging equities while US monetary policy has largely normalised and we are past the inflection point in terms of interest rate increases. For US/China trade, a truce in 2019 could clear the way for Trump’s re-election in 2020 while in the UK, the chances of a delay or revocation of Article 50 are rising faster than that of a chaotic no-deal Brexit. Sharply declining survey data and continuing profits downgrades (even if profits growth still remains positive) are, however, two key counter points to the bullish argument. Nevertheless, a major slowdown in 2019 remains less probable than a soft landing at this point and global equity allocations should be at least at neutral rather than cautious, in his view.
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29/11/2018
Equity strategy and market outlook - November 2018
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In this month’s strategy piece, Alastair George believes that 2018 has been the year that the US Fed normalised US monetary policy. Evidence of this is in the restoration of normal market volatility, lower global equity valuations and a strong US dollar, in addition to higher US interest rates. With Fed chair Powell suggesting in recent days that US rates are just below the broad range of the Fed’s estimates of the neutral level, expectations of a pause in US rate increases have risen, even if this observation is only consistent with previously published Fed projections. Even given the possibility of a further easing of Fed rhetoric in coming weeks, the investment outlook remains difficult to read in our view due to key political risks directly ahead, the most significant of which are the potential for a no-deal Brexit and US trade policy with respect to China. On balance, earnings risk keeps our cautious view on global equities in place. We are mindful of the 2015 experience where the resources and energy sectors continued to decline despite attractive valuations, until earnings forecasts stabilised. We can also see the relative merits of a risk-free 2.8% annual return on US two-year Treasury notes in the circumstances.
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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%.