Brexit: Prepare for a confrontation
No-deal preparations on both sides represent a predictable escalation in tensions
UK PM Theresa May has survived the confidence vote triggered by her own party. A further proposed House of Commons confidence vote is also destined to be defeated. However, PM May’s continued premiership does not mean there will be no change in Brexit tactics. She faces the same unresolved conflicts as before. In order to deliver her deal, she may shift towards a more confrontational position with the EU in order to obtain increased leverage. Investors should not confuse this with actively seeking a no-deal Brexit. However, the road to amending the Withdrawal Agreement and winning UK Parliamentary approval now seems paved with market volatility. While UK markets are now trading at valuation levels which discount a significant degree of Brexit disruption, declining earnings forecasts in both the eurozone and UK suggest that it is too early to materially increase equity exposure to these markets.
Read more...Brexit on pause as UK PM challenged
ECJ Article 50 decision means UK Parliament is in control of its destiny
After letters from at least 48 MPs, the UK Conservative party will now hold a confidence vote in its leader later today. If the incumbent UK PM May fails to secure a majority of Tory MPs, a leadership contest will be triggered. The postponement of the Parliamentary vote on May’s Withdrawal Agreement and subsequent day of flying around Europe meeting heads of state, yet appearing to achieve little but photo opportunities has forced the matter to a head. Regardless of the outcome of the confidence vote, the Brexit process is at stalemate with the UK Parliament unable to ratify the only agreement the EU is prepared to offer to date.
Read more...Economic survey data on a weakening trend outside US
The fly in the ointment for investors trying to look through political developments
Following a difficult autumn, investors are likely to be weighing whether 2018’s risks are almost in the rear-view mirror. Brexit could conceivably be settled by January, with minor changes to the Withdrawal Agreement; the Italian budget stand-off could be resolved by a telephone call. In terms of financial conditions, the Fed may raise rates in December but could guide to a pause, reflecting economic or market turbulence. Similarly, the ECB could acknowledge that the weakening trend in eurozone data warrants a continuation of QE, or at least some very doveish forward guidance. Finally, following the mid-term elections, rebel Trump’s politically motivated trade war on China is now without a cause, at least in the short-term. Speculation of a US/China trade “deal” at the upcoming G20 meeting in Argentina is rising, which could perhaps at least represent a cease-fire in hostilities. Such a shift in sentiment may seem far-fetched, but should at least be considered alongside more bearish scenarios.
Read more...Brexit: A decisive step into the fog
Limited support for UK PM May’s Brexit deal creates further uncertainty
UK PM May’s Brexit deal has achieved the unlikely honour of uniting both pro-EU and Brexiteers in rejecting it. Despite a difficult House of Commons session yesterday, she only reiterated later her role is to finalise the text and bring it back to Parliament for a vote in December. At this point it is difficult to see how she will succeed. A key rival is in the process of securing the 48 letters required for a vote of no-confidence and she has failed to secure a new Brexit minister. Without an election, any new PM would have the difficult task of renegotiating the current deal - and would have to create a credible deterrent of no-deal to succeed. An election risks a Labour government less accommodating to the corporate sector. Both these scenarios are likely to be unwelcome for financial markets. The probability of sufficient change to the draft agreement to pass the UK Parliament appears slim but would in contrast be welcomed by investors.
Read more...2019 Earnings forecasts softening
October market declines coincide with falls in non-US 2019 profits outlook
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.
Read more...Market valuations improving in UK and Europe
There are risks, but valuation risk is slowly receding, with the exception of the US
October’s equity market volatility may already be in the rear-view mirror despite the evident risks of Brexit and lingering concerns over Italian debt sustainability. If markets stabilise close to current levels, the recent volatility may in hindsight be seen as a helpful correction towards aligning equity market prices to normalised interest rates and bond yields. Following the recent market declines, but following solid earnings growth and ROE in 2018 to date, median non-financial price/book levels, with the notable exception of the US, are now close to long-term averages. While there may be concerns over the sustainability of current profit margins, rising bond yields or geopolitical events, valuations can now move down from the top of investors’ lists of risks.
Read more...