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Market Insights – 21st October 2019

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

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Essentials

The International Monetary Fund (IMF) has once again cut its world growth projections for 2019 (3% against 3.2%) and 2020 (3.4% against 3.5%). Central bank stimulus policies and an easing of the trade war should avert the risk of further downward revisions.

Although less than 10% of the S&P 500 has released its results, we can already say that this season is looking good. The task is made easier for companies by the extremely cautious expectations of analysts. This should lead to many positive surprises, such as the 75 companies that reported profits on average 4% higher than expected.

In the last quarter, growth in the Chinese economy reached its lowest level in nearly three decades. This slowdown, from 6.2% in the previous quarter to 6%, may seem alarming at first glance but simply reflects a gradual normalisation, regardless of the tariff issue.

 

To the finish !

More than three years have passed since the referendum in which the British voted to leave the European Union. As is often the case, this divorce is turning out to be a painful one. On the European side, nations feel betrayed by a long-standing ally. Across the Channel, the political landscape is fragmented and the people deeply divided. Some still hope that this project will be abandoned, as is the case in part of the British Parliament. These hopes may well be disappointed.

Prime Minister Johnson seems fiercely determined to deliver on the promise made a few months ago, to meet the 31 October deadline. And he is using all his political talent to lead the country towards this deadline. He has negotiated a new agreement from his European partners by removing the sensitive issue of the reintroduction of a border between the Republic of Ireland and its British neighbour Northern Ireland. He now has a good chance of obtaining the consent of the Westminster Parliament despite a first refusal at the end of last week by confronting his political rivals with their own contradictions.

How can we persist in refusing a reasonable agreement after having long sought the assurance that a Brexit without a “deal” could not happen. This is the puzzle facing Labour who will undoubtedly have to concede a political victory to Boris Johnson or risk a lasting loss of credibility with their electorate. This is all the more so since the Prime Minister maintains the threat of an improbable “No deal”. And, for its part, the European Union, tired of this situation, is currently hesitating to grant a further postponement of Brexit. Both the President of the European Commission Jean-Claude Juncker and Emmanuel Macron are now making it clear that it is time to close the Brexit file and look to the future. The pressure is mounting in London on the eve of a historic moment that will be missed by some and applauded by others. If, as we believe, Boris Johnson’s deal were to be accepted by Parliament, the reduction in the political premium should lead to a recovery in the pound sterling and support for European equities. For British equities, the impact could be more mixed. International stocks could suffer from the strength of the pound, while more domestic stocks would benefit from the decline in uncertainty.

The art of the deal

 The trade war, which has been going on for over a year now, has turned into a never-ending series of repeated words and actions, making it feel a little like the film “Groundhog Day”. It is not easy to keep track of the tariff rates in place and the amount of imports they affect, and this back and forth makes it challenging to position in the short-term or to say with conviction how likely a deal could be.

So what does the rest of 2019 have in store for these countries? Their stock markets would respond well to a trade deal, even a temporary one. That said, Bei-
jing’s opponent is so unpredictable that there is little incentive for the Chinese government to agree to a hasty compromise – after all Trump or his 2020 successor could reject whatever deal that is reached at any moment. Meanwhile, China has managed to draw out the talks for more than a year, which gave it time to halt its deleveraging campaign. It is now far better equipped for a long battle, a stance Xi Jinping made quite clear in early September. In fact, if the US wanted to clinch a deal at this point, Beijing could possibly demand more concessions from Trump, who is gearing up for his re-election campaign.

The chances of a deal being reached are low, but so are those of a further escalation in tensions, especially since the impact of the tariffs are starting to be felt in the USA. However, given the measures taken by central banks and the fact that emerging-market valuations remain attractive – both relative to other regions and on a historical basis – we believe there is limited downside risk and that these markets could surprise on the upside in the event of a deal before year-end.

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