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Market Insights – 18th November 2019

Each week, a team of experts shares its market views with you.

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Piguet Galland Bank Market

Essentials

Growth in China’s output fell short of forecasts in October and slowed compared with the September figures, with industrial production dropping to 4.7% year on year. This has hurt the Hong Kong stock market, which continues to be weighed down by the violent protests affecting the region.

Economic news is improving in the eurozone, including Germany. The ZEW forecast indicator has picked up sharply so far in November and clearly outstripped expectations, while the present situation indicator has stopped declining. These numbers have probably already bottomed out – unless the trade tensions take a turn for the worse. 

Eurozone GDP grew by 0.2% in Q3, which was in line with forecasts and the Q2 figure. The highlight was the 0.1% uptick in Germany’s GDP, which means the country has avoided a technical recession.

The pound continues to rally

The early general election is fast approaching in the UK. In less than a month, we will know what the House of Commons will look like for the next five years. And above all, we’ll know whether Prime Minister Boris Johnson has won a large enough majority to get his Brexit deal through parliament. He should be reassured by the latest polls. They put the Tories in the lead, with close to 40% of the vote. And this percentage has kept going up in recent weeks. The Conservatives also seem to have benefited from the drop in support for Nigel Farage’s Brexit Party, which is now expected to get less than 10% of the vote, down from more than 20% in the middle of the summer. The most fervent proponents of a hard Brexit seem to have rallied around the prime minister’s plan for an orderly exit from the EU.

But Boris Johnson is no doubt watching Labour’s recent upswing in the polls with concern. With an estimated 30% of the vote at present, Jeremy Corbyn’s party will be ready to step in if Mr Johnson doesn’t manage to win a majority. Mr Corbyn could form alliances with some of the moderate parties in order to form a government and snap up the job of prime minister, which could result in Brexit being shelved indefinitely. That’s why, in recent days, Mr Johnson has made a slew of electoral promises to try and secure his lead. He’s spoken, for instance, about concessions on government spending and tax cuts. But what does seem increasingly unlikely is a no-deal Brexit on 31 January 2020.

This fading risk has helped to push up the pound in recent weeks. Since mid-August, it has gained more than 10% against the euro and the Swiss franc. But sterling is still undervalued and trading well below the levels recorded before the Brexit referendum in June 2016. The pound therefore has major upside potential, especially now that the UK economy has shown that it can withstand the Brexit uncertainty. All it will take for it to restore its place among the elite of strong currencies is a clear majority in the 12 December elections, so that the country has a stable government that won’t have to worry about the risk of a vote of no-confidence with every topic up for debate.

USA – is there any upside left?

With the S&P 500 reaching new record highs, we can now safely say that 2019 will be an exceptionally good year in this cycle of stock-market expansion. But the big question is: do US stocks have any upside left after gaining more than 24% this year?

Almost all of the US indexes’ solid performance in 2019 can be put down to expanding multiples. US stocks are now trading at 18 times 12-month forward earnings, up from 14 times at the start of the year. So for US stocks to rise further, corporate earnings will need to pick up significantly. Investors seem to be pricing in an uptick in economic activity that presupposes a 10% rise in earnings in 2020. Next year’s earnings forecasts, which have been revised down sharply, will therefore have to stop falling or pick up from current levels if US equities are to make any further headway.

What’s more, the current stock-friendly climate will have to continue into 2020, as we expect it will. Low inflation, an accommodative monetary policy and an easing of US-China trade tensions will help to keep share prices at current levels or push them slightly higher. We therefore think that US equities will still be attractive next year, even if they are unlikely to perform as well as they did this year.

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