Search Follow us
9 November 2018

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...
16 October 2018

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...
11 October 2018

Rising US bond yields spark volatility breakout.

Synchronised declines in global equity markets may help stockpickers

October’s sharp declines in equity markets are being attributed to rising US bond yields. However, the surge in volatility is similar to that seen in January and raises questions about an underlying weakness in equity market depth rather than any radical change in fundamentals. It was hardly a secret that bond yields were likely to rise further over time given the strength of the US economy. Furthermore, a quarter-point increase in US 10y rates to 3.25% is not an especially large move. Recent increases in the US 2y rate perhaps went against the grain of Powell’s August comments but again were not especially noteworthy. We believe investors should first ensure that portfolios are appropriately positioned from a risk perspective, given the likelihood of a higher volatility trading environment.  Second, investors should be actively looking for securities which have been unfairly discounted in what has been an indiscriminate sell-off. However, we do not feel it is time to change our cautious stance on developed equity markets in general.

Read more...
17 September 2018

2018 Earnings forecasts stable over the summer.

Only marginal declines in EMs suggest that fears of an imminent crisis are overblown

There is a relatively strong correlation between the direction of earnings forecasts and the short-term relative performance of equity markets. Over the last 12m, US markets have outperformed peers as Trump’s corporate tax reductions and fiscal stimulus have provided a tailwind for US earnings. In the UK, although weighted earnings forecasts have risen, UK stocks have trailed behind, impacted in our view by the negative domestic sentiment in terms of Brexit. Similarly in continental Europe, market sentiment has been impacted by international and domestic political events. Intriguingly, the median emerging market forecast has only fallen by 2% since the Q1 peak, similar to the UK and Europe, suggesting fears of an imminent crisis are not at present feeding through to the corporate sector.

Read more...
12 September 2018

Choose your narrative with care for 2019.

Trade, politics or tighter US monetary policy? One may have a light at the end of the tunnel

In the 10 years since the global financial crisis of 2007-2008 there has been a perennial fear that the withdrawal of central bank support would lead to a collapse in asset values, which had been artificially inflated by ultra-low interest rates and asset purchases. With equity markets outside the US now having fallen by 13% in US dollar terms since the peak in Q1 18 as US interest rates have risen, it is very easy to become convinced this is the start of something bigger. While experience is in general an advantage, investors should beware of the risk of being too quick to make emotive links with the run-up to the 2008 financial crisis and emerging market crises of the 1990s. Notwithstanding the recent market declines, when we look ahead into 2019 we can see scenarios which imply a continued, albeit slower, global GDP and profits expansion - and a pause or slowing in Fed rate increases.

Read more...
13 August 2018

Turkey:When risks collide.

US sanctions on Turkey overlay political risk on economic fragility

Turkey has long been the beneficiary of substantial US dollar funding. However the Erdogan administration is now on the receiving end of US sanctions, having failed to agree to the release of a US pastor held under house arrest in Turkey. A 28% fall in the Turkish Lira last week has highlighted the risks to a corporate sector highly reliant on dollar borrowing. In addition, solutions now appear down to geopolitics rather than domestic economic policy. Given the already entrenched positions of both the US and Turkey, resolution in the short-term appears unlikely in our view. For investors not exposed to Turkey, the lessons are twofold. First, economic fundamentals do now “matter” as the era of cheap and plentiful US dollars draws to close. Second, the rise of populism on both sides of the Atlantic continues to translate elevated political risk into actual investment outcomes.

Read more...
23 July 2018

Earnings estimates: Marginal declines could point to trouble ahead.

Regions outside US now showing modest downgrades

Outside the US, most equity sectors have suffered modest downward revisions to 2018 earnings forecasts over the past four weeks. Within the US, 2018 earnings forecasts are effectively unchanged over the same period. It is too early in our view to be certain that this loss of momentum in non-US estimates is the start of a downtrend but it is consistent with the recent sharp declines in industrial commodities. The good news for 2018 – such as US tax cuts and continuing Eurozone expansion was always in our view a H1 phenomenon. The more challenging narratives such as rising US interest rates were in contrast likely to endure for longer. Furthermore, trade war uncertainty has reached a new peak.

Read more...
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.

Read more...
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.

Read more...
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.

Read more...
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.

Read more...
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.

Read more...
17 March 2016

Was there a “plaza” accord after all?.

Yesterday’s FOMC statement and Yellen’s press comments were unequivocally more dovish than the markets and we were expecting. Going into the meeting there was a reasonable case for preparing the markets for a rate increase in early summer, given declining unemployment and increasing US core CPI. As it turned out, external factors – perhaps a euphemism for undesirable moves in global markets and the US dollar – were in contrast almost overplayed. For us, “Peak fear” was last month’s story, so why bring it up now?

Read more...
RSS - Strategic Insight
Sector report cover
*Multiple Sectors
29/11/2018
Equity strategy and market outlook - November 2018

In this month’s strategy piece, Alastair George believes that 2018 has been the year that the US Fed normalised US monetary policy. Evidence of this is in the restoration of normal market volatility, lower global equity valuations and a strong US dollar, in addition to higher US interest rates. With Fed chair Powell suggesting in recent days that US rates are just below the broad range of the Fed’s estimates of the neutral level, expectations of a pause in US rate increases have risen, even if this observation is only consistent with previously published Fed projections. Even given the possibility of a further easing of Fed rhetoric in coming weeks, the investment outlook remains difficult to read in our view due to key political risks directly ahead, the most significant of which are the potential for a no-deal Brexit and US trade policy with respect to China. On balance, earnings risk keeps our cautious view on global equities in place. We are mindful of the 2015 experience where the resources and energy sectors continued to decline despite attractive valuations, until earnings forecasts stabilised. We can also see the relative merits of a risk-free 2.8% annual return on US two-year Treasury notes in the circumstances.

Download the report