Earnings forecasts: 2019 wraps up with a whimper
Steady downgrades over the last 12m leave 2019 profits little higher than 2018
Author: Alastair George
Past the peak of political risk?
Could Brexit and US/China trade be in the rear-view mirror for 2020?
For over a year, investors have had to embed a risk premium for adverse political developments into global asset prices. For example, a US challenge to the long-standing consensus on the benefits of free trade has been a novel and unwelcome development. Furthermore, the uncertainty surrounding the form and timing of any departure of the UK from the EU has had a dampening effect on investment and profits on both sides of the English Channel. We are now seeing progress being made on both these questions during October which raises the prospect that they may be in the rear-view mirror for 2020. We continue to believe bearish positions on European equities may over-cautious in the context of still very low yields on government bonds.
Read more...Brexit: Through the fog of war on public opinion
EU and UK play poker and maintain elevated uncertainty
Author: Alastair George
If the objective of the EU was to demonstrate just how hard it is to leave the Union under Article 50, it would have surely succeeded. The UK has been put into a position where Parliament has rejected a government-negotiated Withdrawal Agreement three times. Now, under a new PM the UK has finally put forward detailed alternative arrangements for Northern Ireland. Despite initially positive indications, the EU presently appears to have baulked at these proposals, aiming perhaps at forcing the UK to extend Article 50 and conduct another general election to break the Parliamentary deadlock. We believe no-deal at the end of October remains a low probability. In the circumstances, in our view investors should keep sight of the relatively discounted valuations of sterling and UK equities for the medium-term.
Moving to a neutral position on global equities
Late cycle but monetary cavalry in sight and profits forecasts now stabilising
Author: Alastair George
We have been cautious of global equity markets since Q219, fearing that global equities had run ahead of a renewed downtrend in 2019 profits forecasts. In addition, political risks remained unresolved. The most recent data for September suggests that while economic activity remains muted the rate of decline has moderated and profits forecasts may have stabilised. As importantly, given the 12-18m lags, the effects of lower interest rates globally on the world economy will shortly begin to show in the data. We believe equity investors should be alert to improving economic momentum at this time. Notwithstanding the still outstanding political risks, with many large-cap companies now yielding well in excess of the new lows in long-dated government bond yields, we move up to a neutral position on equities.
Read more...Staying focused on the facts – the risks remain in place
A familiar set of risks must not be allowed to breed contempt
Author: Alastair George
The recent modest relapse and rise in volatility in global equity markets since the beginning of August has highlighted yet again the headwinds of the US/China trade standoff, slowing global economic momentum and Brexit. The moves in bond markets over the same period have arguably been more significant, reflecting fears the US Fed in particular is lagging behind events. The US 2y/10y yield curve slope is once again close to zero, indicating bond investors sense a coming recession.
Read more...2019 earnings forecasts back on a declining trend
Faith in policymakers’ support for corporate profits may yet be tested by markets
Author: Alastair George
Consistent with the weakness in global PMI survey data, we find that a weakening trend in 2019 earnings forecasts has taken hold. We recognise that for many investors corporate fundamentals will matter less than the near-term direction of monetary policy at the present time. However, slowing economic growth does appear to be having a detrimental effect on profits momentum. On an unweighted basis, 2019 forecasts are now 10% lower than a year ago in the UK and eurozone and nearly 15% lower in emerging markets. The US has held up better with a 3% decline in earnings forecasts over the same period.
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