Trendwatch. What will impact equity prices in 2015?

13 May
man with telescope

Taking the long view

What are the possible storms on the horizon which might make waves in the UK market? Recent macroeconomic trends which will heavily impact the relative success of British equities are the strong pound, and the continuing low price of oil.

Invest in UK Buyers

Companies which depend heavily on exports might not do as well as those selling largely to a domestic market. Sterling is outperforming vs the dollar, with the 200-day moving average this Wednesday standing at 1.5632. The peak providing point of comparison was 1.5710 on December 16th. And the Euro, the currency of Britain’s other main export market, is also waning in comparison with the pound as GBP:EUR continued to increase today, to 1:1.39EUR, correct at time of publication.

The pound surged on the strength of news the Conservatives were back again, and was given an added boost after better than expected UK March industrial output data on Tuesday, which implied a moderate upside revision to Q1 GDP.

Labour market data released today are also positive: the 3-month moving average for earnings (including bonuses) is at 1.9% vs a predicted 1.7%. And unemployment rate is, as predicted, 5.5% though the number of claimants did not fall by nearly as many as expected.

Expert predictions for the Sterling Euro outlook were given to poundsterlinglive.com (https://www.poundsterlinglive.com/eur/2063-forecasts-for-euro-to-pound-mid-may-66456456). They include

Westpac:

“EUR/GBP has slid sharply after the decisive victory by the Conservatives but it has only unwound the election uncertainty premium built in just ahead of the election. Moreover, with Grexit risk on the rise GBP may benefit from some late safe haven flow. Bottom line EUR/GBP risks have flipped and wouldn’t be surprised to see the pair test 0.70 in the next week or two.”

Charles Stanley:

“Pre-election jitters drove the UK currency down to a three-month low of 1.34 last week but Friday’s result provoked a rebound that looks like it might have further to run in the short-term. Despite its recent choppy price action the chart is suggesting that a run back above 1.40 has become a realistic near-term expectation and that we have probably seen the bottom for now. “

And the Consumer Staples and Consumer Discretionary sectors catering to a UK market are likely to look increasingly attractive, as the Conservative electoral victory means an EU referendum is back on the agenda and Britain’s relationship with the Continent is clouded by uncertainty. The Guardian reported today that Cameron plans to bring the referendum forward, from 2017 to 2016.

Black Gold? Fool’s Gold…

And, while oil prices –taking Brent Crude Oil as an indicator – have recovered some ground over the past month, the long-term outlook is not great. Between April 14 and May 12, Brent Crude rose from 58 to 65GBP.

However, a recent OPEC assessment, as reported on by the Wall Street Journal, predicted that over the next ten years it was unlikely oil prices would rise above $100 barrel again. OPEC is allegedly considering re-introducing the quota system it dropped in 2011. The most positive scenario modelled by OPEC was that oil would retail for $76 a barrel in ten years’ time.

Clearly competition from rival energy sources like natural gas and renewables means that now is a time to avoid oil company stocks, unless you are confident in following a contrarian strategy. Green energy, on the other hand, keeps going up and up.

As a general proxy, look at the all-world Dow Jones Sustainability Index (DJSI), whose total return at the end of last month (April) was 1896.15, denominated in USD. The price return of the DJSI World Index, which is a better indicator of the value gains of its constituent parts, had increased to 1305.37 USD from 1264.41 at the end of March.

Historic data are not publicly accessible for beyond the three-month period, which is a shame because February was an unusually volatile period for markets in general so does not offer an accurate point of comparison: The Dow Jones went from around 17200 to 18500USD over the course of February, ending on a 6-month high.

So essentially, consider disinvesting from the big oil corporations which dominate the FTSE 100 and switch to any company which will benefit from cheaper oil prices – which is almost all of them, bar those providing services or equipment in some way to oil companies. Unless you are convinced your oil-producing asset has a strategy to ride out the new pricing norm.

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