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.
Read more...Equity valuations – party like it’s 1999… and 2007?
Amidst something approaching a euphoric relief rally in global markets following the UK’s vote to leave the EU, investors should not overlook equity valuation metrics, which have historically provided an excellent guide to returns over the long term. As Exhibit 1 shows, relatively low valuations preceded the bull markets in 1994-1999, 2002-2007 and 2009-2013. However, valuation metrics rarely form part of a market narrative and if they feature at all are often dismissed, usually as “it’s different this time”.
Read more...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.
Read more...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.
Read more...BOE: All priced in and nowhere to go?
Investors hoping for another “get out jail free” card from the Bank of England tomorrow are likely to be disappointed. Expectations for a cut in interest rates are close to 100% and the collapse in gilt yields since the UK’s referendum highlights the belief that UK rates are now set to remain low for much of the next decade.
Read more...Brexit webinar - One month on
A month after the UK’s vote to quit the EU, markets are moving on. Despite the UK’s new Prime Minister committing to implement Brexit, global markets remain calm, even if sterling is still well below pre-referendum levels. Within the EU, aggressive Brexit rhetoric has given way to the realisation that a mutually beneficial relationship will need to be found between the UK, the EU and its member states. Early indications suggest a slowdown in the UK in some regards, but earnings estimates have only fallen modestly so far – and only in the most exposed sectors.
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