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UK EQUITIES: POLITICAL UNCERTAINTY COMES INTO PLAY (1057
GMT)
Politics is now playing a starring role in the relative
underperformance of UK equities despite them being so cheap.
Berenberg economist Kallum Pickering wrote in a note about
the UK's economic outlook that the feedback he got from clients
suggests the state of British politics may be holding back
investors when it comes to UK PLC.
"Referring to issues ranging from continued Brexit noise
to the Conservative government’s sleaze scandals, several
clients remained cautious of the UK due to a perceived high
level of political uncertainty", Pickering said.
"Nearly all such concerns were framed along the lines of ‘UK
fundamentals look good but...’ and then came some – usually well
justified – caution linked to the UK Prime Minister and his
antics", the Berenberg economist added.
His note came in yesterday before a video surfaced showing
Boris Johnson's staff laughing and joking over how to explain a
gathering in Downing Street during a COVID lockdown last
Christmas.
It follows a string of scandals that have led opposition
politicians to accuse the Johnson government of cronyism and
corruption, and of behaving as if rules do not apply it.
While it remains anyone's guess as to how these scandals
will dent Johnson's leadership, his replacement at 10 Downing
Street is now a hypothesis some economists factor in.
"As an outside bet, we see some risk of a leadership contest
in 2022 (which would probably be followed by a snap general
election)", Pickering wrote.
There is some kind of silver lining in that scenario.
"If and when Johnson is ousted as Prime Minister, markets
may be inclined to strike a much less cautious tone on the UK",
Pickering argued.
Talking about the chances to see Johnson being replaced, RBC
Capital Markets published this chart which shows how bookmakers
raising the odds for a change of leadership.
"If we take the bookies’ pricing as a proxy, the threat to
Johnson’s survival as PM is much greater from the current
allegations than was the case the at the last peak back in the
spring", commented Chief Currency Strategist Adam Cole.
"The kneejerk reaction would probably be negative to the
rise in political uncertainty", Cole predicted, adding that it's
less what the consequences for the pound would be further down
the road.
"Our assumption is that a Sunak-led government would be more
fiscally conservative and less “populist” than the current
government", he added.
Going back to UK equities, the fact that the bank of England
is expected to tighten sooner than the Fed and the ECB is also
of course not a competitive advantage for UK stocks.
"This, together with the residual uncertainty on the final
post-Brexit set-up makes investors a bit reluctant to enter in
strength on UK stock markets", said Giuseppe Sersale, fund
manager and strategist at Anthilia, who downgraded UK stocks to
neutral in October.
Some reading here:
Cheap UK equities: value trap or opportunity?
ANALYSIS-No-brainer bet on cheap UK stocks disappoints,
believers hang on
(Julien Ponthus with Dhara Ranasinghe and Danilo Masoni)
*****
BULLS STILL IN ACTION (0858 GMT)
European stocks are higher again today amid hopes that the
new coronavirus variant won’t trigger any disruptions for the
global economy.
A bit of rotation is helping with defensive shares, such as
healthcare and utilities, leading gains, pushing
the Stoxx 600 index up 0.4%.
The oil and gas stock index, which outperformed
yesterday, is the worst performer today, down 0.5%.
Some analysts argue the time is ripe to take some profits
before U.S. inflation data on Friday, which might convince the
Fed to tighten its monetary policy even faster than currently
expected.
"In U.S. trading, the Dow Jones Industrial Average achieved
its best 2-day performance since Nov 2020, and biggest daily
gain since March,” Raymond James analysts say, adding it looks
"very much like a short covering induced revival."
They also suggest "that, beneath the surface, conviction
levels remain brittle and sentiment vulnerable to a reversal on
adverse newsflow.”
Among single stocks, Games Workshop is down 6.5%
after its trading update, Berkeley Group is up 5.15
after raising its profit outlook.
(Stefano Rebaudo)
*****
A LITTLE BIT OF FEAR, A LITTLE BIT OF HOPE (0828 GMT)
A little bit of hope and fear defines markets on Wednesday,
with investors showing no signs yet of winding down for
year-end.
Let's start with the fear part, which centres on China's
troubled property sector. Shares in the country's biggest
developer Evergrande have hit all-time lows after a missed debt
payment deadline put it at risk of becoming China's biggest
defaulter.
Note too that trading in shares of embattled smaller peer
Kaisa Group Holdings was suspended, after a source
with direct knowledge of the matter said Kaisa was unlikely to
meet a $400 million offshore debt deadline.
Hopes of a managed debt restructuring at Evergrande are
somewhat calming the angst. But even if the fallout so far has
been broadly contained, fears linger of how the crisis might
impact the world's second-biggest economy.
But as the trading baton passes from Asia to Europe, it's
hope that's taking hold.
Already Asian shares have risen to near two-week highs on
optimism that the Omicron variant of the coronavirus may be less
disruptive than initially feared.
U.S. stock futures are trading higher, European futures are
flat. That sentiment boost also lifted the Aussie dollar to its
strongest level in a week.
Markets have shown themselves remarkably resilient to
political crises, and they appear to be shrugging off President
Joe Biden's warning that Russia risked "strong economic and
other measures" if it invaded Ukraine.
Possibly news of a two-hour Biden-Putin chat is being seen
as a positive.
Finally, Wednesday brings the end of an era in Germany,
where Olaf Scholz will take over as Chancellor, bringing an end
to Chancellor Angela Merkel's 16-years as head of Europe's
biggest economy.
Key developments that should provide more direction to
markets on Wednesday:
- Australia joins diplomatic boycott of Beijing Winter Games
- India's c.bank holds rates as inflation, Omicron risks loom
- Weibo shares fall 6% below issue price on Hong Kong listing
- Japan downgrades Q3 GDP on deeper hit to consumer spending
- German exports/current account
- ECB speakers: President Christine Lagarde, Vice-President
policymakers Luis de Guindos, board member Isabel Schnabel
- Iceland central bank meets
- US JOLTS job openings/10-year Treasury auction
- U.S. earnings. Campbell soup, Gamestop
- European earnings: TUI, Stagecoach, Berkeley
- Bank of Canada meets
(Dhara Ranasinghe)
*****
EUROPE READY TO TAKE A BREATHER (0728 GMT)
European equities seem to be ready to pause for breath after
yesterday’s substantial gains when investors cheered signs that
Omicron can be less dangerous than first feared.
Markets are wary that volatility will remain the winner
until there isn’t a clear view about the new coronavirus
variant's capacity to evade vaccines and transmit.
The focus is now slowly shifting to U.S. inflation data due
on Friday, which might give the Federal Reserve more reasons to
speed up its monetary tightening.
While European stock futures are lower, its U.S. peers are
in positive territory, with the Nasdaq ready to provide support
to tech stocks.
(Stefano Rebaudo)
*****
