18 Mar 2019
As the public still waits for greater clarity on Brexit, there are a few barometers for financial market performance after the UK leaves the European Union.
This article forms part of the UK's 'Weekly Digest' series.
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This week we are potentially faced with “Meaningful Vote 3” – or possibly no vote at all if Mrs May feels that another defeat is on the cards. If she can whip up enough support, the betting points towards a short delay and then departure at the end of May (the month, that is, not the PM); if not, an extension of up to two years is mooted. So a range of outcomes large enough to drive a campaign bus through, which hardly makes for short-term clarity.
Even so, the pound, our trusty “Brexit barometer”, continues to trade in a manner that suggests the diminishing probability of a catastrophic (in the market’s eyes) “No Deal”.
There are also signs that investors are being drawn back towards shares with a greater UK focus.
The more global FTSE 100 Index (75% overseas revenues) has produced a total return of 9.2% so far in 2019; the Mid-250 Index (50% overseas) has returned 11.5%.
Admittedly Small Caps have lagged (+6.8%), perhaps awaiting more evidence.
In local currency terms the UK looks like a laggard this year, but in common currency terms there is little to choose between the UK, the US and Europe.Some of this is in anticipation of higher weightings for China’s shares in key global indices, but much of the move acknowledges that the “hard landing” that was being increasingly priced in last year is not imminent. Indeed, if anything hopes are rising that stimulus measures are going to bear fruit soon. The market has also been supported by the country’s army of private investors, who tend to play the stock market much as others might enter a bookmakers, and so we acknowledge that China’s share indices will continue to be more volatile than others.
Citigroup’s Global Economic Surprise Index has rallied and fallen back again, but at least we now no longer have the poisonous cocktail of disappointing economic data and the threat of tighter monetary policy that sent markets into a tailspin last year. Indeed, signs of a more general economic upturn into the spring would be unequivocally good news for markets, assuming that central banks continue to stand back until the autumn.
At least there is no major earnings recession currently expected, which suggests that dividends, the least volatile component of investor returns, will remain well supported.The other big adjustment that investors have had to make in the last six months is on company earnings. At the beginning of the fourth quarter, expectations for global earnings growth in 2019 were set at 10% (on Citigroup consensus estimates). Now they are running at 5% (using the same series, although I have seen top-down forecasts just either side of zero). At least there is no major earnings recession currently expected, which suggests that dividends, the least volatile component of investor returns, will remain well supported. Interestingly, forecast earnings growth for 2020 is now 10.6%, up from 9.3%.
I have written in the past about how analysts tend to initiate their forecasts for any single year looking for around 10% growth and then revise (usually down) accordingly. 10.6% growth is very much business as usual and certainly takes no account of the possibility of a US recession, which there is no shortage of economists predicting. That, in a US election year, looks like it will be the key call for 2020. The current US expansion will be the longest in history if it extends past July. Viva Forever??
About the author
John is Head of Investment Strategy for Investec Wealth & Investment UK, is a member of the Global Investment Strategy Group, and is Chair of the Investec & Investment UK Asset Allocation Committee. John graduated from Exeter University in Modern Languages in 1984. He spent 27 years as an institutional stockbroker with Merrill Lynch and Lehman Brothers, before moving to investment management in 2011 and joining Investec in 2013. John is an Everton FC supporter.