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20 June 2018

Earnings revisions: No sign of a trade war (yet).

US estimates rising again while Europe and UK remain stable

In our view developed market equities remain in a benign de-rating phase, moving only sideways as profits rise and unconventional monetary policy is withdrawn. Critical to this view is a robust set of profits growth figures for 2018. Despite a significant slowing of economic momentum in the UK and Europe, consensus forecasts there still call for 8-9% 2018 earnings growth on a median basis. In the US, profits forecasts have seen another leg higher in recent months. The median US company is now expected to deliver close to 20% earnings growth in 2018. While there remain legitimate concerns and “headline risk” in respect of US trade policy, in our view and for the near-term, investors seem unlikely to dash for the exits with profits growth this strong.

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12 June 2018

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.

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7 June 2018

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.

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25 May 2018

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.

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25 May 2018

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.

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9 May 2018

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.

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20 April 2018

High equity valuations face macro headwinds.

Factors behind record run of corporate profitability may be fading

We have had a cautious view on global equities for longer than has been comfortable. In truth, over the last 12 months this view has been 50% right at best. European markets, including the UK, have delivered relatively little capital growth. However the US and emerging markets have moved significantly higher. When the headlines are focussed on geopolitical events, it is also easy to lose sight of the anchor of equity valuations. We have updated our equity valuation measures and find that the US market in particular remains notably expensive while European markets still appear overvalued. We recognise that this has in part been justified by the record run of corporate profitability but the factors driving this phenomenon may now be going into reverse.

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16 April 2018

2018 Earnings forecasts: Still robust, for now.

Corporate sector soldiers on despite increasing geopolitical tensions

Geopolitics will in our view continue to present headline risk for the rest of the year. The US/China trade détente has broken apart as the US administration addresses the prospect of China challenging for dominance in the world economy. This weekend’s military response to the use of chemical weapons in both Salisbury, UK and Syria may for now be described as “mission accomplished” but it remains to be seen what the response would be to any further provocation. At the same time, there has been a run of disappointing economic data in the eurozone. Nevertheless, earnings estimates remain relatively stable for now in aggregate as the recent strength of the oil price leads to upgrades in energy, offset by modest downgrades in other sectors.

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23 March 2018

Market declines: US LIBOR or US trade war?.

Headlines scream trade war while a surge in US LIBOR is tightening US financial conditions

It is very easy to point the finger at US trade sanctions against China as a reason for the recent declines in equity markets. The prospect of a near-term confrontation, in respect of access to markets and IP protection (a free competition zone perhaps rather than a free trade area), is clearly unhelpful for global equity sentiment. China’s transition from a catch-up nation to an economic competitor always had to be resolved at some stage. However the second dynamic at work during Q1 18 is a rapid rise in US LIBOR, over and above that of official US interest rates. This is tightening monetary conditions rather faster than policymakers may have intended.

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15 March 2018

2018 Earnings forecasts: US stable, modest declines in Europe.

Watch for ebbing economic momentum as survey data peaks

Despite the increase in equity market volatility, there has been little follow-through to economic fundamentals to date. US earnings forecasts have stabilised and are indicating mid-teens profits growth for 2018, of which approximately one-half appears to be due to US tax reform. US economic surprise also remains relatively strong. In Europe however, unweighted earnings estimates have continued to fall, if modestly, and perhaps more importantly here economic surprise indices have turned sharply lower. We view this as partly due to Brexit uncertainty in the UK and a rising EUR exchange rate in continental Europe.

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6 February 2018

Volatility spike: Investors have only themselves to blame.

The only mystery is why markets were so placid in the first place

Perhaps controversially, we view the intellectual horsepower being consumed by the legions of writers commenting on every second’s movement in markets over the last few days not dissimilar to the wasted electricity consumed to validate speculative bitcoin transactions. Both activities are in our view of relatively modest economic value, even if there is currently heightened demand. There have been, in a historical context, only modest declines from the highs for major stock markets, albeit concentrated in the stronger local currency year to date performers of the US and Japan. In volatile times, investors must remain focused on the long-term outlook.

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1 February 2018

Rising bond yields: Mini-drama perhaps, but not a crisis.

Rising yields a ‘known’ risk – declining economic momentum would be a bigger concern

This week’s modest declines in equity markets may be the largest of the last nine months but that is only an illustration of just how far equity market volatility has fallen. The narrative of rising bond yields and inflation expectations is being used to explain the market declines. This is understandable and we ourselves have previously highlighted the anomalously low level of global bond yields. However, rising yields are a known risk for 2018 and unlikely to create a major sell-off in equity markets by themselves. We would be more concerned if there was firm evidence of a meaningful slowdown in economic momentum. Such evidence is - for now - largely absent in either Europe, the US or China.

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18 January 2018

Earnings: The real Trump bump.

Median per share earnings upgrade of 4% for S&P 500 following tax reform

Analysts’ profits forecasts have edged modestly higher in the first month of the year in continental Europe and the UK, as would be expected during a period of above-consensus global economic data. In the US however, tax reform has added to the cyclical economic strength, pushing median 2018 profits forecasts dramatically higher, up 4% over the past month alone. This represents 2/3rds of our total expected benefit to US earnings from tax reform. Earnings revisions data supports our strategic view of strong momentum carrying over into Q1/Q2 2018. However we also note that economic surprise indices may have peaked in January and combined with forecast rate increases, markets may yet tread water as the year progresses.

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14 December 2017

Market volatility unsustainably low as bonds and equities diverge.

Bonds and equities appear to be simultaneously pricing two scenarios – so why is volatility so low?

There is now a growing disconnect between low global government bond yields which appear to indicate that the global recovery of 2017 may prove transient and high equity market valuations which discount an extended period of strong profits growth. In addition, starting from Q1 17 there has been an astonishing and sustained decline in equity market volatility. While there is nothing which suggests a market regime change is imminent, we continue to believe that re-normalisation of monetary policy is likely to result in the re-normalisation of volatility, bond yields and equity valuations over the 2018-19 period. This is not in our view a good time to be seeking to maintain returns by increasing portfolio risk.

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4 December 2017

US tax reform a modest positive for US equities and dollar.

Estimated total corporate tax benefit of US$ 74bn per year is not a game-changer

The prospective headline cut to the US corporate tax rate from 35% to 20% is a positive but not as significant as it may look at first sight. Historically, the US corporate sector has enjoyed an effective tax rate closer to 25% due to ample scope for deductions. The US Congressional Budget Office believes that the total revenue lost from the US business taxes from the Senate tax bill would be $744bn over 10 years. Following implementation, this would represent approximately a 6% increase in net income for the US corporate sector from 2019.

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24 November 2017

Economic surprise accelerating.

Positive economic surprise still offering short-term support for risk assets

The positive economic surprise data seen over the last 3m continues to strengthen. If anything, the data is moving faster than any monetary tightening leading to a benign environment for risk assets such as equities. What is more of a conundrum is the lack of response in global bond yields, even as the final developed market central bank to move, the Bank of Japan, is now hinting that it is past peak monetary accommodation. Earnings forecasts for 2017 remain robust with median growth close to 10% for developed markets and a similar level of growth forecast for 2018.

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14 November 2017

Valuations: An important part of the puzzle.

Price/book multiples highlight worrying trend in risk appetite

In this cycle valuations have been, so far, the dog that did not bark. Globally, the median sector price/book multiple has risen from the trough of 2008 to a new peak. Such an expansion in market valuations is similar to that seen in the 1980-1987 period. Between 2012 and today we have come full circle in terms of tactical asset allocation. Earlier, we could not understand why investors were so uninterested in adding risk to portfolios despite such high expected returns in equities. Now, equity valuations suggest only modest long-term returns are on offer and there is greater prospect of short-term disappointment. It is however proving equally difficult to attract investors’ interest in this signal for caution. Perhaps the metaphorical - and silent - valuation dog knows the psychology of the current marginal investor rather too well.

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2 November 2017

Government bonds in the firing line.

The next twist in the story is likely to push global yields higher

It is always important to put aside preconceptions and let all the data speak – and not just that which confirms prior beliefs. At present, the data which best models the long-term outlook (valuations) are suggestive of relatively weak returns in global equities and this has informed our cautious positioning. Furthermore, bond yields and interest rates remain unusually low on a historical basis. Yet for the short-term, economic surprises are currently positive, business sentiment strong and profits growth relatively robust. It is this short-term data which also needs to be heard.

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19 October 2017

Profits forecasts stable – but no positive surprises.

Stronger PMI indices not following through to profits growth

While Q3 has brought something of a renaissance in economic surprise and purchasing managers’ indices we can at present see no sign of this improved sentiment in profits forecasts for 2017. Our weighted average consensus earnings forecast index remains steady for each of the UK, US and Europe ex-UK and the equal-weighted measures have declined, if modestly, since mid-year. In prior periods, our earnings forecast index tended to move slightly ahead of PMIs and economic surprise. The more recent data has not followed this pattern and highlights that what is good for the overall economy is not by necessity good for corporate profits. Furthermore, with central banks on a tightening path the risk for equity markets is that tighter policy is not offset by stronger profits growth.

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9 October 2017

Economic data surprising to the upside in Q3.

Strong PMI indices add weight to the case for tighter monetary policy

While valuation concerns for equity markets remain in place, recent economic data in the US and eurozone also points to something of a mini-surge in economic momentum over the last 3 months. PMI data has been coming in ahead of expectations and economic surprise indices have turned higher in all regions. During 2017, investors have had to balance their longer-term valuation concerns with generally robust profits growth and improving economic sentiment. While soft data such as PMI indices should not significantly shift portfolio asset allocations, a hiccup before the end of the year is now looking less likely.

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21 September 2017

US rates: Has the fuse been lit?.

Conditions for synchronised, if gradual, tightening of policy appear in place

To our surprise yesterday’s Fed statement and projections not only re-confirmed the probability of a rate increase later in the year but also continue to forecast three further rate increases in 2018. Furthermore, the Fed announced the pace of reduction in its balance sheet which, while an initially modest US$10bn per month in October will rise to US$50bn per month by the end of 2018.  The initial market reaction has been for the yield curve to flatten further as investors price in an increased probability of a Q4 rate rate increase while US 10y bond yields rose by only 3bps. Equity markets may be sanguine for now but we view this monetary headwind as a slow-burn fuse which may challenge investors again during 2018.

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16 August 2017

Earnings momentum remains stable for now.

Economic surprise driving EUR v USD but no FX hit to eurozone profits estimates

It may be the perfect environment for passive strategies as the lack of catalysts during 2017 has led to a continuation of the low volatility yet highly-valued equity market regime. In particular, it has been a robust year for corporate profitability. 2017 earnings growth forecasts remain pinned around 10%. Even while the medium-term outlook for markets looks challenging on valuation grounds as extraordinary monetary stimulus is unwound, those looking for a significant correction in the short-term should beware as corporate earnings trends remain robust at present.

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11 August 2017

North Korea: A problem not of Trump’s making.

Missile development program slowly shifts the political balance

North Korea’s recent successful test of a missile capable of reaching much of the US mainland is clearly a concern but it is not because such an attack is imminent or likely. The history of military rocket development suggests that it will still be some years before North Korea could be assured of a successful, let alone multiple, strike on the US or even Guam. However, in the event of any attack, the overwhelming superiority of US forces would undoubtedly ensure the destruction of North Korea. Therefore in many respects Trump’s most aggressive comments this week were a statement of the obvious and investors should accordingly not over-react, even as volatility has risen during thin trading over the holiday season.

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17 July 2017

Fed policy: Don’t forget your flip-flops.

US inflation and growth numbers undershoot expectations

It is just a few weeks since the US Fed raised interest rates and central bankers globally opined on a removal of monetary accommodation (albeit slowly) as the global recovery gathered momentum. Unfortunately, some inconvenient facts are already casting their shadow. The Atlanta Fed US GDP nowcast for Q2 17 has fallen to 2.4% from 4% at the start of June, with disappointing US retail sales contributing to the downgrade. Furthermore, core CPI has undershot expectations with the year-on-year figure now at 1.7% for June, compared to 2.3% at the start of the year. Fortunately for central banks, the holiday season has started and the focus may be elsewhere. However, some re-calibration of the trajectory of US monetary policy may already be necessary.

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29 June 2017

A tipping point as monetary policy shifts.

Central banks on both sides of the Atlantic appear to be becoming more hawkish

In recent weeks, policymakers at each of the US Federal Reserve, Bank of England and ECB have become notably more hawkish. This is a new development as throughout the period 2010-2017 central bank balance sheets have been steadily expanding as the quantitative easing (QE) baton was passed around the globe. With asset prices rising strongly over this period many commentators have been quick to infer that the end of QE signals market trouble ahead. While certainly a headwind, we believe investors should not rush to judgement. There remain many acts to play out in this story before it is finished.

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21 June 2017

Equity risks are rising: economic surprises turning lower.

Economic surprise turns lower and positive earnings momentum easing in Europe

We are viewing with increasing concern the building evidence of disinflation in industrial commodity and energy markets. Economic surprise indices have turned sharply lower on a global basis, a move which cannot be fully explained by seasonal factors. In this context we were surprised by the relatively hawkish recent policy statements by the US Federal Reserve and Bank of England. For the US Fed, it was very much a case of one and not done at the recent FOMC meeting, where US rates were increased again. For now, earnings growth forecasts near 10% for each of the US, UK and continental Europe remain intact but we also detect ebbing momentum in this data compared to 6m ago.

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12 June 2017

Fed rate decision: One and done - or not done?.

One and not done would spook markets in our view

On Wednesday 14 June, we believe the US Fed is highly likely to raise the target range for the federal funds rate by a further 0.25%. We believe the opportunity the move policy rates further away from the zero “lower bound” will not easily be passed-up as US unemployment figures improve and as importantly without spooking markets, which have priced this move in. However, a signal of “one and done” for 2017 – or at least “one and wait and see” will be critical to keep markets buoyant. In addition, investors will be watching for benign comments in respect of any adjustments to the Fed’s balance sheet policy.

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1 June 2017

Volatility: Low, but downside protection in demand.

We struggle to understand why market volatility has fallen so far in 2017

One of the notable aspects of equity market performance during 2017 has been the rapid fall in market volatility. Trailing 90-day realised volatility for the S&P 500 has reached 7% in recent weeks. Over the last 20 years, these are levels are matched only during a brief period over 2005-2006. We do not see an especially strong parallel with 2005 as at that point US equities were still moderately valued and the US economy was expanding after a mild recession. We believe investors are once again becoming complacent; but also note the skew towards higher priced put options suggesting within the options market at least that downside protection is at a premium.

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14 May 2017

Earnings forecasts: a short-term support for markets.

Rising estimates notable in continental Europe

While economic surprise indices may now be rolling over, US earnings forecasts for 2017 are effectively unchanged since January. In the UK and continental Europe forecasts have risen relatively sharply since the start of the year, reflecting in the UK a continued tailwind from sterling weakness and in continental Europe the long-awaited improvement in economic activity.

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5 May 2017

Not really an economic surprise….

Economic surprise indices and raw materials prices rolling over in Q2

One of the notable features of improving sentiment in global stock markets over the last 6 months has been its reliance on ‘soft’ economic data and a continuation of positive surprises. We cautioned in March that economic surprise indices were both seasonal and mean reverting and also highlighted the tightening of monetary conditions in China, historically linked to declines in iron ore prices. Six weeks later, global economic surprise has rolled over outside Europe while energy, coking coal and iron ore prices are falling sharply.

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24 April 2017

French Election: Is populism already passé?.

Relief rally follows 1st round vote which puts Le Pen against a moderate

If last year was the year investors were caught out by misleading polls, today’s market action suggests that investors are being caught out by mistrusting them. A collapse in near-term euro volatility, sharply higher equity markets and a compression in the spread between French and German government bonds emphasises the relief that Le Pen was not in a run-off with a far left-wing candidate.

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23 March 2017

Market wobble? Still time to re-position portfolios.

No clear trigger for recent market declines

Even if some calm has now returned, the market declines this week are perhaps a little more disconcerting than usual as they have occurred with no obvious trigger and followed an extended period of very low volatility. This makes the situation a little more uncertain, as specific triggers can often be analysed, quantified and discounted. There is therefore the danger of investors becoming fearful of the unknown - and risk averse - should the declines become more serious.

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16 March 2017

Just what the Fed wanted.

A rate increase and a rising market – but was it really dovish?

Having primed markets to fully expect a US rate increase, the FOMC followed through on the 15th March. If the aim was to deliver a rate increase without abruptly causing tighter financial conditions (code for declining equity and credit markets), then it was mission accomplished. Following the FOMC announcement the dollar eased against other currencies, bond yields fell and equity markets gained. However, despite comforting language within the statement we detected a more strategic, rather than data dependent, direction for US interest rates in the press conference Q&A.

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13 March 2017

Ready for the rollover?.

Tentative evidence of slowing economic momentum

Despite buoyant global asset markets, we are seeing increasing evidence of slowing economic momentum. In the US, bank loan growth has slowed significantly since Q4 16 and the Atlanta Fed’s GDP nowcast is only indicating 1.2% US growth for the current quarter, compared to over 2.5% as recently as early February. In the UK, the services PMI peaked in January and is now declining while in Europe - a bright spot in terms of economic surprise – disappointing German factory orders cast some doubt on the durability of any recovery. China’s M2 money supply growth has also ebbed since Q1 16, suggesting an easing of basic materials prices, should prior correlations still hold.

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23 February 2017

FOMC minutes: Fairly soon = March or June?.

FOMC minutes highlight risk market will be caught offside by Fed in 2017

The most recent FOMC minutes suggest to us that March is a live meeting for the next US interest increase, in contrast to market expectations which imply a less than 20% probability of a hike. We believe the market continues to underestimate the resolve of the US Federal Reserve to use the opportunity of low unemployment and close to target inflation to re-normalize US interest rates.

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16 February 2017

C’est l’économie… French and German bond yields diverge.

It’s not the unlikely election of Le Pen, it’s the economy ...

The recent divergence between French and German government bond yields has been widely attributed to a possible victory for the anti-euro Marine Le Pen in the French presidential election. In our view this is not the whole story. The widening gap in terms of borrowing costs also mirrors the increasing economic divergence between France and Germany. Therefore, the increased risk premium for French government debt should be expected to persist, even after the election of a mainstream candidate, adding to pressure on the euro project.

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16 January 2017

Earnings Revisions: Waiting for upgrades?.

Though global equities continue to benefit from significantly increased investor optimism, US and continental European earnings forecasts for 2017 have remained stubbornly static over the last 3 months. However, in the UK 2017 earnings estimates continue to move higher, tracking the decline in sterling and providing a degree of fundamental support for the FTSE100. For US and continental European equity markets, the increasing divergence between 2017 profits forecasts and their respective price performance, when added to the lack of valuation support, puts a question mark over how much further the rally can run.

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9 January 2017

Valuations trump noisy narratives: increased caution on global equities.

Price/book valuations point to sub-par equity returns over the next 12m

Judging only by current equity market valuations, global equity investors are significantly more likely than usual to achieve only below average returns over the next 12 months, if prior correlations remain a guide to the future. Average price/book multiples for world equities are once again at peak levels, similar to those prevailing in 2007 and 2000, and this is reinforced by a similar picture for P/E ratios. We believe investors should factor in the possibility that broad equity market exposure may result in weak or negative returns and stock-pickers cannot rely on a tailwind of benign markets over the next 12m.

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5 December 2016

You can’t be given a bloody nose twice.

The vote ‘no’ to Italian constitutional reform in this Sunday’s referendum has cost the Italian prime minister Renzi his job and perhaps thrown the Italian government into turmoil. Markets are however not in turmoil. The euro is close to unchanged, having fallen modestly after the referendum result. European equity markets are sharply higher this morning. While Italian 10y government bond yields have breached 2%, this increase in yields is notably less sharp than at the time of Trump’s election. Investors who panic sold after Trump and Brexit have been reconditioned (correctly in our view) to not immediately re-price risk on the back of specific political events.

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14 November 2016

Forward guidance - Trump style.

These are strange times in global markets. Trump’s election, previously feared as a universal negative for global markets, has been accompanied by remarkable strength in risk assets. We highlighted investor positioning as a factor last week but now question if there is there more to this rally? Could Trump’s fiscal policies represent a “whatever it takes” moment?

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10 November 2016

Trump’s double surprise.

It is quite clear that in the days leading up to the U.S. Presidential election, both markets and surveys got it wrong. Traditional polling once again failed to spot the depth of support for radical political change. This was after all the U.S., which has delivered the strongest post-crisis economic performance of any developed nation. 

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4 November 2016

BOE: Bank on track.

Today’s BOE decision represents a correction in UK policy makers’ thinking. The sudden stop in activity which was implied by the Bank’s August stimulus package has not materialised and the focus has instead returned to significantly above-target inflation by 2018. This is going to be supportive of sterling, especially as consensus views on the exchange rate had become so negative.

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21 September 2016

Just don’t mention the yen.

Today’s “Comprehensive Assessment” by the Bank of Japan of its stimulus efforts has in our view underemphasised the role of the weaker yen in bringing Japan out of deflation. The data show a very strong link between lagged moves in USD/JPY and Japan’s core inflation rate, Exhibit 1. Moves in the yen over the last year indicate that Japan’s core CPI may once again be falling back towards zero which may induce the BOJ to engage in further stimulus efforts. However, we wonder if the lower bound on interest rates is not the only constraint central banks are now facing.

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1 September 2016

UK economy and corporate profits: Refusing to follow forecasts.

Since July, there have been over 250 UK corporate earnings reports or trading statements, which we have been tracking for any sign of Brexit-related weakness. Within these corporate filings we can find little evidence, in either outlook statements or in managements’ referendum commentary, to suggest a slowdown in trading is underway.

On the contrary, over 80% of company earnings reports indicate that trading is in-line with earlier expectations. Furthermore, 16% of companies report that trading is ahead of expectations against only 3% reporting that trading has fallen below expectations. In addition, recent data on house prices and manufacturing surveys seem to confirm that fears of a Brexit-induced slowdown in the UK have proved overblown, over the summer at least.

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16 August 2016

Earnings forecasts: Reassuringly stable?.

Recent trends in consensus earnings forecasts highlight analysts’ confidence in corporate performance for 2016, even as GDP forecasts continue to decline. For now, it appears that the global phenomenon of steadily declining earnings forecasts, a factor behind the relatively weak 2015 equity market performance, has ebbed. There also remains no observable impact on aggregate UK earnings forecasts from Brexit to date, although as we have previously noted for the UK, FX benefits for exporters have offset modest downgrades to sectors focused on the domestic economy.

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10 August 2016

Gilt shortage: It takes two to tango.

Yesterday’s failure by the Bank of England fully cover its bond purchase order indicates that the re-introduction of QE has created a significant squeeze in the UK’s bond market.  This auction failure highlights a possible constraint on the BOE’s QE policy, at least until a more expansive fiscal policy delivers a significant increase in the future supply of gilts or substitute securities.

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RSS - Strategic Insight
Sector report cover
*Multiple Sectors
28/06/2018
Equity strategy and market outlook - June 2018

In this month’s strategy piece, Alastair George believes that the US vs rest of the world trade confrontation is becoming the dominant narrative. We cannot rule out at this point that negative responses in financial markets may be a prerequisite to negotiating a face-saving route out of the situation for all sides. However, earnings estimates show few signs of the impact of tariffs or disappointing UK and eurozone economic data and robust growth for 2018 remains the consensus forecast. Profits forecasts have even risen in the US in recent months and the median US company is now expected to deliver close to 20% earnings growth in 2018. However, offsetting the benefits of strong US profits growth is the prospect of tighter US monetary policy and larger fiscal deficits. The recent trade protectionism-related flight to safety is understandable but in our view current US 10-year Treasury yields still appear too low. Emerging markets may continue to struggle as the Fed remains focused on US domestic condition. There is no change to our cautious outlook. We continue to believe developed equity markets are in a period of consolidation. Valuations are moving closer towards long-run averages with markets simply trading sideways as profits grow while monetary policy is normalised.

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