We suspected that a hung parliament would likely result in an
\ninvestor shift away from domestically-focused risk assets amid
\nheightened uncertainty raised by a return to coalition politics.
\nAhead of the election our managed funds, fixed income and global
\nequity desks were broadly neutral on the UK, and within the
\nregion we had been allocating to large caps and more
\ninternationally-focused growth companies.<\/p>\n
But trying to predict which way markets would move felt even
\nmore problematic than it might have ahead of previous UK
\nelections \u2013 as with last year\u2019s referendum on European Union
\nmembership, several polls were within the margin of error. In the
\nevent, the market response fell along predictable lines, with a
\nweaker sterling, strong equity performance led by overseas
\nearners, and sustained weakness in shares exposed to the
\ndomestic economy.<\/p>\n
With respect to Brexit, our base case is that a fairly hard Brexit,
\nwhere we lose single market access, would result in a weaker
\nsterling and a more vulnerable gilt market. The failure of the
\nConservative Party to gain a majority in the election has thrown
\nadditional light on the Article 50 negotiations with much discussion
\non whether a coalition government (containing a chastened
\nConservative party) would lead to a softer Brexit. Indeed, the
\nmechanics of Brexit itself are central to forecasting economic
\noutcomes. While on the one hand it is possible that the UK might
\nbe able to withdraw its Article 50 application before two years
\nlapse, it is also conceivable that the nuts and bolts of Brexit are
\nnot agreed over this period and a chaotic, cliff edge Brexit ensues.<\/p>\n
Under a softer Brexit or a no Brexit, any risks to growth are judged
\nto be on the upside, with a less inflation-tolerant Bank of England.
\nA cliff edge Brexit presents meaningful macro risks, threatening
\nan already weak consumer, with a likely move higher in gilt yields,
\nled by outflows from overseas investors. Our base case is for a
\nfairly hard Brexit in which immigration remains a key issue and
\naccess to the Single Market is lost or severely constrained.<\/p>\n
So how has all of the above impacted our forecasts for the UK?<\/strong><\/p>\n We are turning more cautious on domestivally-exposed UK equities, as existing headwinds Despite these headwinds, we anticipate growth in corporate earnings per share of 20% this year, Elsewhere, developments across the European high yield corporate fundamental landscape Developments in the UK have led us to renew our focus on the
\nhave been brought into sharper focus following the election result. These companies must
\ncontend with further softening in consumer spending, as uncertainty rises and inflation erodes
\nreal incomes; moreover, the savings rate has collapsed, pushing the household financial
\nbalance into deficit for the first time since 2008. Large global companies may also be vulnerable
\nto weakness in the US economy, especially those that are richly-valued. Meanwhile, the one off
\nboost to international earners from weaker currency may have run its course.<\/p>\n
\nfalling to 7% in 2018. These forecasts are supported by the fact that investor underweights to
\nUK equities are close to pre-Brexit lows, opportunistic M&A activity is picking up, and at 15
\ntimes 2017 earnings, valuations \u2013 particularly compared to the US \u2013 appear attractive. Finally,
\nUK equities continue to offer a good dividend yield of 4.1% (falling to 3.7% excluding
\ncommodities). In short, corporate profits are somewhat underpriced at present.<\/p>\n
\nhave been positive and appear likely to remain positive for a number of reasons. For example,
\nthere are only frictional or idionsyncratic defaults on the horizon, and meaningful outflows
\nacross public funds (combined with a supply glut across March and April) failed to derail
\nstrength in the market earlier this year. From a valuation perspective the market looks rich
\nrelative to its history, but the market was rich in the years before the credit crunch (2005-2007),
\nillustrating that the lack of a negative catalyst can continue to attract investors as long as
\nspreads over-compensate them for embedded credit risk \u2013 this appears to be the case today.<\/p>\n","protected":false},"excerpt":{"rendered":"
\nregion in recent weeks, amidst the start of Brexit negotiations and
\nthe general election. We have not made any changes to our
\nneutral position on UK equities and UK rates, or our negative view
\non sterling.<\/p>\n","protected":false},"author":1,"featured_media":64192,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1480],"tags":[1663,1809,1655,1651,2087,2148,1650,2068],"_links":{"self":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/64194"}],"collection":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/comments?post=64194"}],"version-history":[{"count":0,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/64194\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media\/64192"}],"wp:attachment":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media?parent=64194"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/categories?post=64194"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/tags?post=64194"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}