Weekly View : Anticipation reigns
After no shortage of dramatics, Boris Johnson has secured a Brexit deal with the EU: step one complete. Step two is the parliamentary vote – the step that tripped up Boris’s predecessor not once, but thrice. After the vote failed to take place on Saturday, we will see today what lies in store for Boris’s deal. Looking ahead, Brexit’s long-term effects on the economy are yet to be appreciated, which is a reason to remain selective in UK assets. For now, the relief rally has provided a further boost to risk assets already supported by the prospect of a ‘phase one’ US-China trade deal. Value stocks and small caps in particular stand to benefit from continued positive developments around Brexit. Further certainty will also allow for a rise in long-term rates leading to yield-curve steepening.
The Chinese economy grew at a slower rate than expected in Q3 at 6.0% – its lowest quarterly growth rate in three decades. However, today China is the world’s second largest economy; thirty years ago it was not in the top ten. While China currently faces a number of growth headwinds – including, but not limited to the trade war with the US – its economy is too big to continue growing at break-neck speed. Furthermore, the Chinese government has plenty of fiscal levers at its disposal to help buffer the slowdown should need be. There was also some good news in Friday’s data, including a 5.8% increase in industrial production in September over the previous year. Through liquidity injections and central bank rate cuts, Chinese authorities will try to stabilise the economy.
Although still early in the game, the Q3 earnings season has surprised positively so far, especially for US banks. Figures have been good both in terms the percentage of companies beating expectations and the average surprise that is positive. However, with weakening US retail sales data, we will be watching US consumer data very closely in coming months, given the vital role consumer spending plays in US growth. Margins appear to be holding up well despite a slowdown in top-line growth, which is encouraging. Conversely, the emerging market (EM) earnings season started on a weak note, with sales in line but earnings behind expectations. We remain neutral in developed-market equities and prefer to play EM through local currency sovereign debt.