Edison Investment Research

UK earnings trends - stable and few surprises

There has been much speculation in regard to the economic and market impact of the UK’s vote to exit the EU. However, even four weeks after the date of the referendum, there is no hard data to rely on. In the circumstances, survey data may also be misleading, with the risk that it reflects a projection of the personal views of respondents rather than a cold analysis of future prospects.  However, early indications are that 2016 UK consensus earnings forecasts have remained stable, a continuation of the trend seen since February.

Brexit, Fed: a short squeeze

If in the short-run the market is a voting machine, as attributed to value investor Benjamin Graham, yesterday’s 3% rise in European markets represents a vote of confidence in the Remain campaign winning the UK’s referendum on Thursday and a consistently more dovish US Fed for the remainder of the summer.

Fed boxed in by yield curve

It is looking increasingly likely the US Federal Reserve has missed its chance to engage in a meaningful interest rate tightening cycle. Globally, 10-year government bond yields have fallen sharply – in many cases to new record lows, in part due to the recent US jobs data and in part the increasing uncertainty over Brexit. This flattening of the yield curve is a strong indicator for a period of sub-par US growth, even if survey data has, for now, improved somewhat during Q2. Whether or not we are looking at a technical US recession is perhaps, technical, as in any case a period of even weak growth is inconsistent with positive surprises for corporate profits and equities.

Beware of buy and hold

The last few decades of the 20th century represented a golden era for equity investment with an average compound annual return, including dividends, of 14% pa in the period 1973-2000 for the US, UK and Europe. In this century to date, the annualised rate of return has fallen to 5%.

Earnings forecasts: absence of a negative is not a positive

Profits forecasts for the US, UK and Eurozone have been stable for the last 2 months. In the context of last year’s relatively dramatic declines in profits expectations (the worst year in a decade) this is a welcome development for equity investors.

Brexit: Ultimately unlikely

Edison has not taken any formal position on the desirability or otherwise of the UK leaving the EU. We are however pleased to provide the following summary of the key issues.

First, we believe any discussion on Brexit should be placed in the proper context. Based on current polling data it is significantly more likely than not that the UK will remain in the EU in the two years following the referendum on June 23rd. Online polls may indicate a nation split nearly 50:50 on the issue, but online polls also proved significantly less accurate than telephone surveys in the UK’s most recent election.