Henk Potts' Market Review
Henk Potts – Barclays Global Investment Strategist
Henk Potts joined Barclays Bank in 1998 as a graduate and worked as a Stock Market Analyst for Barclays Stockbrokers, focusing on UK equities. In 2009, he was appointed Director of Global Research & Investments for Barclays Wealth and Investment Management, where he works as part of a team formulating and communicating investment strategy to internal and external clients.
Henk analyses a wide variety of asset classes, including equities, currencies and commodities, as well as ascertaining and explaining the effects of macroeconomic changes on financial markets.
Weekly Review – Monday 17 October
Henk discusses the stories that dominated the headlines and moved the market over the previous week’s trading and also highlights the key events that are likely to dominate during the course of the week ahead.
The below content has been taken from Henk’s weekly podcast. If you’d prefer to listen to this, you can do so via Stockbrokers TV.
Movements in foreign exchange markets
We did see global equities trading lower last week as early third quarter earnings reports fell short of expectations. We know investors have been reacting to those volatile foreign exchange markets, political uncertainty hitting sterling but also the South African rand. If you look at the Fed minutes they suggest that September’s payroll report, which was remember lower than expected in terms of new jobs, did little to bring a rate hike any closer in the United States. The minutes suggest there that dovish members continue to dominate. But the real main action of course was in currency markets. Sterling fell dramatically last week, hitting a three decade low against the dollar trading just above the 121 level, and its lowest level since early 2009 against a basket of currencies, 90p to buy a euro.
I think the market’s been questioning whether capital flows will continue to go into the UK, the pound more vulnerable to invest flows and other currencies given the high level of debt and the deficit level we got in the UK. Remember the UK has still got a debt GDP ratio of 90%, a large current account gap equivalent to 6% of GDP. I think in the short term we’ll continue to see the dollar very strong against sterling. But as we go through the next few months and certainly through 2017 one would suggest that actually the lends of Brexit will start to widen out to not simply focused on the UK and on sterling, but for what it means in terms of fragmentation and contagion risk within the eurozone. So yes the euro has been strong but we’d expect it to weaken quite significantly against the dollar but also against sterling over the course of the next 12 months.
Have Brexit fears disappeared?
If you look at the September surveys they’ve mostly continued the August post-referendum policy relief rebound. Manufacturing output rose to its highest level in two years. New export orders rose to their highest level since the end of 2013, of course being helped by sterling’s depreciation, but there’s certainly a suggestion there’s more to come there. Services output only barely eased. And if you look at corporate output rose to above the pre-referendum level. Alongside that we’ve seen a modest rise in investment intentions and corporate sentiment has been helped by firms thinking the Brexit impact will be less pronounced than previously feared. And that is seen as I think positive along with the improvement that we’ve seen in the GFK consumer confidence barometers.
So we’ve seen a range of these reports and surveys coming through suggesting the UK economy has been holding up better, but not all the surveys it has to be said have painted such a rosy picture: output fell in the latest CBI and BCC surveys. But what we should also remember is financial market volatility has been rising, in fact back to financial crisis levels, triggered by speculation of a hard Brexit. The anti-immigration stance of senior ministers at the Conservative Party Conference starting to filter through to markets as well. We think such a hard line stance by the UK government is likely to result in continued elevated volatility in the near term, which I think will weigh on business sentiment, cutting the post referendum relief rally short.
So yes we’ve held up OK. I still there’s a long way to go. What we do know is businesses are becoming more and more nervous, they’re holding back those investment intentions. And that comes through over time. So we know business is probably committed to their current investment plans over the course of the next three years. It’s looking beyond that. It’s looking on the five-year, the ten-year horizon where we start to see companies holding off; growth slowing down, unemployment starting to pick up will also hit household demand. So I don’t think we can say actually we’ve escaped the Brexit downturn entirely. The probably worst fears have not come to fruition but there’s still certainly plenty of disappointment to come with growth slowing down quite substantially over the course of the next year.
S&P earnings report
If you look at analysts’ expectations – remember only 7% of S&P companies reporting earnings so far; we get another 91 companies reporting this week. According to FactSet data the blended earnings, so that’s a mixture of what we’ve seen already in the estimated earnings, looking for a decline in S&P 500 earnings, around about 1.8%, led by weakness in energy and industrial sector. The index does report a decline for the third quarter, mark the first time the index has reported six consecutive quarters of year-on-year declines in earnings since FactSet began tracking the data back in the third quarter of 2008.
US earnings we know have been coming under pressure for a number of reasons: lower levels of global growth, the stronger US dollar, which reduces demand for US products and of course it impacts overseas earnings when translated back into dollars, low energy and commodity prices. Analysts not expecting earnings to grow until the fourth quarter, but for all of 2016 analysts are projecting earnings to decline slightly year-on-year, only by 0.1%, but revenue to increase by 2.2%. Then it starts to look a little bit brighter as you look out to 2017: analysts projecting strong earnings growth 12.8%, revenue growth of 6%. So in the short term still pressure, longer term I think corporate profitability will be bouncing back in the S&P index.
I hope you’ve found this update interesting and I wish you every success for the trading week ahead.