Peter Szopo am 19th April 2016 © Fotolia.de
What financial markets are telling us about Brexit
The UK’s exit from the European Union – known as “Brexit” – would be a major economic and political event for the UK, Europa and the wider world. While Brexit is not the most likely outcome (see the first blog in this series), it is a real possibility, raising questions, how financial markets will respond. In this column we present some evidence on how Brexit fears have affected markets so far and our thoughts what we can expect going forward.
Peter Szopo am 15th April 2016 Photo: iStock
The economic implications of Brexit
Opinion polls and betting odds as well as the muted response of debt and equity investors suggest that Brexit – the UK’s exit from the EU – is not the most likely scenario. That said, it cannot be ruled out. For example, about a quarter of all opinion polls conducted in the UK since last autumn resulted in a majority for the leave-vote and there are some signs that the leave-faction is gaining ground as we pointed out in our previous blog on this topic.
Peter Szopo am 13th April 2016 © Fotolia.de
The likelihood of Brexit
On June 23, 2016 the UK will hold a referendum. Voters will decide whether the country should remain a member of the European Union (the “Bremain”-scenario), or whether it should leave the EU (the “Brexit”-scenario). Arguably, Brexit marks the most significant tail-risk for European and global asset markets in 2016.
Peter Szopo am 25th February 2016 © Fotolia.de
Earnings are key for equity investors, as also my colleague Harald Egger emphasized in this blog two weeks ago. This basic truth is even more relevant as usual at a time when a multi-year equity bull market has ended and a wobbly global economic backdrop is weighing on market sentiment. In this situation, corporate earnings can provide important clues whether current market turbulences are mostly reflecting top-down anxieties or something more fundamental in the corporate sector is going on, which will put pressure on valuations.
Peter Szopo am 13th November 2015 (c) iStock
Following last week’s surprisingly strong employment report, the odds that the US Federal Bank will start raising its policy rate at the next FOMC-meeting in December jumped to almost 70%. Of course, 70% is still short of 100%, but most observers believe that something terrible must happen in the next four weeks to make the Fed reconsider, particularly in light of President Yellen’s statement in September that the FOMC’s thinking suggests a “call for a funds rate increase later this year”.
While the case for starting the lift-off remains a close call as Kenneth Rogoff pointed out, it has strengthened in recent weeks as US economic data have turned more positive relative to expectations, according to Citi’s economic surprise index. Most importantly, the improvement in the job market is continuing. The US economy has been adding, on average, 200,000 jobs in the non-farm sector each month in 2015.Read more
Peter Szopo am 09th October 2015 Ⓒ iStock.com
Only in a few months we will likely know, whether the bull market that started in mid-2009 really ended in the summer of 2015. What we know, however, is that the headwinds that have emerged in recent months will not recede anytime soon. Another challenging quarter, it seems, lies ahead of equity investors.
Peter Szopo am 13th August 2015 © iStock.com
If you thought “quarterly” was a simple adverb characterizing a regularly recurring activity, you may need to reconsider. A new term is making the rounds: “quarterly capitalism” – and in this context, “quarterly” stands for “short-term, myopic, greedy and dysfunctional”. In fact, the term was already invented four years ago by Dominic Barton of McKinsey and was swiftly embraced by, among others, Al Gore and Prince Charles to call for a major overhaul of current business practices of listed companies and fund managers. Recently the term has reached a new level of prominence after presidential candidate Hillary Clinton, in a series of appearances, complained that the “tyranny of the next earnings report” resulted in companies’ paying “too little attention on the sources of long-term growth: research and development, physical capital and talent”. Unsurprisingly, Mrs. Clinton’s proposed remedy consists of a mixture of higher taxes and more regulation.
Peter Szopo am 20th July 2015 Photo: iStock
In searching for a perfect example of a sideways market one does not need to look further than at Central and Eastern European (CEE) equity markets. The CECE Composite, a Euro-based index of 23 Polish, Czech and Hungarian blue-chips (Bloomberg: CECEEUR), has been range bound for nearly four years, rarely trading outside a narrow range of ±8% from its mean over the period. A recent spike by 23% that started in January and lifted the index beyond this trading range was halted by the escalation of Greece-related risks. The only market in the region that has participated in the broader equity rally in Europe and the US in recent years has been the Romanian market.
Peter Szopo am 24th June 2015 © Fotolia.de
The longest eleventh hour in recent history is drawing to a close. However, while the negotiations earlier this week seem to have narrowed the gap between Greece and its creditors, a final deal has not emerged yet.
Peter Szopo am 03rd June 2015 © Fotolia
Based on earnings expectations emerging markets equities are currently valued 27% below the price/earnings ratio of developed markets equities. The long term average of this discount is 19%. Closing the gap is a question whether the confidence of the markets in the earnings expectations is solid enough to facilitate a re-(e)valuation.