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14 March 2019 · 3 min read

Brexit: PM May’s deal may finally be in sight

UK Parliament has motioned itself into a corner

This post has been updated to reflect the events of Thursday March 14.

Alastair George, Chief Investment Strategist

This week the UK Parliament has voted to avoid no-deal under any circumstances and at any time. In addition, Parliament comprehensively rejected the government’s Withdrawal Agreement, as modified by the additional instrument and declaration negotiated with the EU at the weekend. Following the votes on Thursday March 14, the choice for next week will be between supporting a short extension to Article 50 – and by implication supporting the modified Withdrawal Agreement - and a much longer extension. Under the second option of a prolonged extension, all possibilities (except perhaps no-deal) are on the table, including a new government, general election and second referendum. It is high stakes but we still cannot rule out the UK Parliament will do the “right” thing, for investors at least, by approving the Withdrawal Agreement - after trying everything else.

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12 March 2019

Brexit: The big guns go silent

PM May has quietened her opposition for now – but will it be enough?

Overnight, the UK and EU have agreed an additional instrument which provides further assurances that the Northern Ireland backstop will be temporary. In particular, should either the UK or EU act in a manner which seeks to apply the backstop indefinitely, as decided by an arbitration panel of judges, then the other party would be entitled to a suspension of its obligations under the Withdrawal Agreement. It is not a time-limit on the backstop, nor a change to the Withdrawal Agreement. It also does not give the UK a unilateral right to terminate its obligations under the Withdrawal Agreement, but merely appeal to arbitration in the event of suspected foul play. Nevertheless, the mechanism for unilateral suspension is a significant concession in our view which may be sufficient to win over enough MPs in the UK’s Parliament. Key to any success will be the legal opinion expected later today of UK attorney general Geoffrey Cox.

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8 March 2019 · 3 min read

ECB: Buy the rumour, sell the news

Markets had run ahead of ECB’s policymaking; valuations suggest near-term rally complete

Despite the ECB’s policy action yesterday, which pushed out the date of the first interest rate increase and confirmed a substantial package of targeted bank financing intended to ease credit conditions for the corporate sector, the market reaction was largely negative. Yet a key part of our bullish call in January was that equity valuations had retreated to levels which were close to long-term averages, a relatively unusual occurrence in this economic cycle. Since then, equity valuations have rebounded sharply as markets have risen while 2019 consensus profits estimates have fallen. This was largely in anticipation of easier monetary policy in our view. We now expect markets to trade only sideways in the absence of a near-term catalyst, while awaiting evidence of a turn in the economy during Q2/Q3. In respect of a US/China trade deal, the apparent cancellation of the Xi/Trump summit due in late March is however unhelpful for sentiment.

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22 February 2019 · 2 min read

Global earnings: Pace of downgrades slowing

Inflection point in downgrade cycle may have been early January

In a welcome development for global equity investors, the pace of 2019 earnings downgrades has eased markedly during the first three weeks of February. Furthermore, while 2019 consensus corporate profits growth has fallen from initial expectations of around 9-11% in developed markets to 6-8%, and from 12% in emerging markets to 10%, a profits recession now appears less likely.  It is still in our view a little early to have conviction this is the start of a sustainable trend. However, if it proves to be the case that earnings forecasts have stabilised it will be supportive of the rally in global equities.

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14 February 2019 · 5 min read

Market outlook: balanced but still biased to upside

Impact of lower rates, China tax cuts and political progress likely to be evident by mid-2019

Weak incoming data, both in respect of profits forecasts and the global economy is in sharp contrast to the strong performance of risk assets such as equities and corporate credit during 2019. Conflicting narratives can certainly create angst but in this case reflect investors’ belief that central banks have acknowledged the slowing global economy. We would concur that easier financial conditions means relief from negative economic surprises may be in sight by mid-year. Despite having risen sharply in the first few weeks of the year, on balance we believe global equities now have the prospect of volatile but still upward progress, as political events unfold.

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6 February 2019 · 2 min read

Global earnings revisions still on a downward trend

Equities bridging a gap in corporate performance - for now

Consensus profits forecasts on a global basis remain on a downward trend even as January’s recovery in risk assets such as equities and corporate debt continues into February. The primary reason for this at first sight paradoxical state of affairs is not hard to find; the US Fed has placed interest rates on pause and acknowledged the slowing of the global economy. Nevertheless, the clock is ticking on the persistence of the current profits downgrade cycle, which is also consistent with economic weakness evident outside the US. While not shifting our neutral stance on equities for the full year, near-term market performance is now in our view more tightly bound than usual to the turn in the direction of global profits forecasts. Therefore, in the short-term we would not chase the rally, at least until there is some evidence of stabilisation in earnings or positive news in respect of US/China trade.

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