Search Follow us
12 June 2018 · 5 min read

Guaranteed security? Investment implications of US foreign policy

North Korea summit opens the way to an easing of sanctions and international recognition – while G7 allies are left reeling

North Korea has recently made enormous progress towards re-integration with the world economy on its own terms, and in particular security guarantees for its incumbent administration. Development of nuclear missile capability in 2017, followed by the willingness to discuss the destruction of this same capability only a year later does indeed highlight that Kim Jong-un may be, in Trump’s words, a very worthy and smart negotiator. Potentially, the prize is as large as a return to the world community of nations. The contrast with the disarray at the meeting of the traditional G7 allies days earlier was striking - and these trade disagreements are the greater risk for markets in our view.

Read more...
7 June 2018 · 5 min read

Global implications of rising US yields

Tighter monetary policy and larger US fiscal deficits point to higher yields ahead – and a higher risk premium for emerging markets

Events in Italy may have highlighted a crowded short position in long-term bonds, with US 10y yields falling by 0.25% to 2.75% during a week of political uncertainty. However, US bond market investors still have to contend with rising short-term interest rates and a substantial increase in the issuance of US Treasuries to finance Trump’s tax reform. Furthermore, this is happening at the same time as the US Fed attempts to reduce the size of its balance sheet. Current 10y yields appear too low in the context of a continued economic expansion and emerging market policymakers are becoming concerned.

Read more...
29 May 2018 · 3 min read

Long hot Italian summer

Likely September elections may be a referendum on euro and EU membership

Italy’s failure over the weekend to form a government was driven by the refusal of the Italian President Mattarella to appoint the hardline Eurosceptic Paolo Savona to the position of economy minister. From the perspective of President Mattarella the recent election was not a referendum on the euro; for the Five Star/League coalition his refusal to accept Savona was interference in the democratic process. An incoming caretaker government is being put in place but is not the issue; elections later in the year will in effect be the referendum on the euro. For investors, this creates significant uncertainty over the summer months and into the autumn.

Read more...
25 May 2018 · 4 min read

Energy drives estimates higher – but oil now under pressure

Risks rising as Russia and OPEC debate turning the taps back on in H2

While it may seem that global investor sentiment has broadly improved over the last 3 months, following the rapid recovery in equity markets, returns have been dominated by the energy sector, Exhibit 1. With Russia and Saudi Arabia now discussing production increases to head off a loss in market share to US shale, this momentum in the oil price may now ease. Separately, despite volatility in emerging markets we note that profits forecasts have been largely stable in 2018, suggesting that any underperformance is due to the rising dollar rather than weakening profits trends. In developed markets, the median 2018 earnings estimate in the US continued to rise over the last month while in Europe and the UK estimates are stable, despite a marked slowdown in the economic data.

Read more...
25 May 2018 · 2 min read

Italy: Political risk strikes (again) in eurozone

Political power and resolve of EU and ECB should not be underestimated (again)

The prospect of a populist Five Star/League coalition government in Italy has spooked Italian bond markets with yields soaring in recent weeks. Nevertheless, this price move may still be viewed in the context of a correction, given the clearly large difference in fundamental credit quality between Italy and Germany, both from a political level and as measured by the government debt burden as a percent of GDP. It is a situation which is likely to create investor anxiety but the precedent of Greece suggests that the ultimate political power of the EU and ECB is considerable. An “Italexit” scenario would create a high degree of market uncertainty but remains low probability in our view.

Read more...
9 May 2018 · 3 min read

2018 Earnings forecasts: Another Trump bump for energy

Rising oil price continues to support 2018 earnings forecasts

While our concerns on valuation remain in place, in the short-term market performance is more closely linked to the trend in forecasts profits. Those looking for a reason to sell equities on this basis are likely to be disappointed. As we approach the half-year point, median earnings growth forecasts for the US remain robust at 18% while eurozone and UK equities are at 8%. For now, our base case remains that the benign derating – equities moving sideways while interest rates and profits increase - will continue.

Read more...