Weekly View - Going the extra mile
We expect increased corporate activity to be a key theme in the coming year. But after eyebrow-raising IPOs from Airbnb and DoorDash last week, gaining exposure to innovative companies pre-IPO via tech private equity funds could be worth investors’ attention, as valuations remain lower before companies hit the market. Unlike the tech bubble of 1999, the current crop of companies coming to market often generates free cash flow without heavy investment. That said, valuations need to be watched closely. Growing tech regulation is another risk. Antitrust action against Facebook in the US indicates that the largest names at least are in the regulators’ line of fire—although it is far from clear that the social-media giant faces breakup yet.
With the UK replete with cyclical, value-driven companies and UK indexes showing historically wide valuation gaps with their euro area peers, our decision a few weeks back to go overweight UK equities has already paid dividends. As for the way ahead, both the UK and the EU declared on Sunday that they were willing to go the ‘extra mile’ to strike a post-Brexit trade agreement. We would estimate the probability of a deal at 60%, although maybe a pretty basic one that excludes financial services and services in general. But at this stage, Brexit on 1 January looks set to cause some initial disruption at borders and provoke alarming headlines more than undermine real market dynamics.
The year end is seeing a spike in central bank activity. Combined with the unblocking of the EU’s recovery fund and pluri-annual budget, the ECB’s announcement that it was extending and expanding its asset purchases is good news for a European economy that we believe will grow by over 4% next year. As for the Fed, market participants will find out this week whether it launches ‘Operation Twist’ to increase the proportion of longer-dated Treasuries it buys. There is a risk that the Fed causes near-term disappointment on this score. But at least equally as important to watch will be any sign of movement on fresh fiscal stimulus. With the festive season almost upon us, this week is probably the last chance we have of receiving a Christmas present from US lawmakers. If not, we may have to wait until January.