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Analisi 29.07.2016

Brexit: UBP ruling out a global recession

Brexit: UBP ruling out a global recession

Experts from Union Bancaire Privée (UBP) – chief economist Patrice Gautry, co-heads of European equities Rob Jones and Scott Meech, and head of fixed income Christel Rendu de Lint – set out their views on the economic environment, equity markets and bond markets after the Brexit vote in the UK.


Despite a majority voting in favour of Brexit in the referendum, UBP's chief economist Patrice Gautry is ruling out a global recession. Although the market uncertainty arising from the referendum result could prove costly, its impact will be more political than economic. "We are ruling out a global recession, and we are currently expecting the world economy to grow by around 3%. So global growth will be moderate, but real nonetheless given the low-inflation background," explained Mr Gautry. In his central scenario, global demand is the factor most likely to weaken. In a context of weak growth and weak demand, the Fed will probably be forced to delay rate hikes even longer.

Europe and eurozone: impact more political than economic

"Similarly, the European Central Bank's monetary policy will remain loose because inflation will stay low in Europe and there is still surplus capacity in manufacturing," according to Mr Gautry. As a result, UBP has reduced its eurozone growth forecasts to 1.4% for 2016 and 1.3% for 2017. "We have adjusted our central scenario to include weaker growth and a weaker euro, along with a higher risk premium on European investments because of greater political uncertainty in Europe," he continued.

So UBP is not expecting any big bang in Europe, either in economic or political terms, but rather risks of a political fragmentation of the European Union, with the possibility of increasing numbers of countries and regions either demanding to leave the EU or to have a special status within it. In Patrice Gautry's view, these political discussions will inevitably affect the ECB's actions.

Recession ahead in the UK?

Mr Gautry believes that only the UK shows a risk of recession, not Europe as a whole.

Short term

Regarding the UK, Patrice Gautry said that "on the economic front, we are not ruling out short-term shocks to consumer confidence, jobs or decisions regarding capital expenditure and foreign direct investment". He expects UK growth to take a hit. He has cut his forecast to 1.4% in 2016 as opposed to the 2.3% seen in 2015, and he sees a high probability of a recession in 2017, with GDP likely to fall 1%, although visibility is very low on that timeframe. The fall in sterling means that UK inflation is expected to rise from 0% to 2%, and significantly above 2% in 2017.

"With growth weakening and possibly turning negative, and with inflation rising, the Bank of England could cut its base rate from 0.50% to 0% and expand quantitative easing," said Mr Gautry.

Medium term

Once article 50 of the Treaty on European Union is triggered, the exit process will take time, with negotiations taking at least two years. "The uncertainty and lack of visibility in the markets will obviously be increased by the unavoidably lengthy nature of the process and the numerous matters that will arise during negotiations, including free trade, free movement of capital and passporting for financial services companies," according to Patrice Gautry. "As a result, we have adopted an extremely cautious scenario, expecting the UK economy to shrink by 1% in 2017."

 

GAUTRY_Patrice_UBP_72dpi-9511.jpg

Patrice Gautry 
Chief Economist  

 


Pan-European equities: a return to defensive stocks

The pro-Brexit referendum result has prompted UBP's European equities team to adjust its central equities scenario. "We have decided to reduce our exposure to financial stocks, particularly banks, as well as our exposure to domestic cyclical sectors such as consumer discretionary," said Rob Jones and Scott Meech, co-heads of European equities. "Meanwhile, we have increased our portfolios' exposure to the consumer staples, healthcare and oil sectors, because of their defensive qualities."

However, the Fed is very likely to delay any rate hikes, which is good news for equities as a whole, and means that Rob Jones and Scott Meech remain confident about capital expenditure. "Based on our discussions with companies, they believe that the Brexit vote will have “have little impact on corporate behaviour in the immediate future”.," they added.

Before the referendum, valuations were low and therefore attractive for certain stocks with good prospects. As a result, there are still good opportunities for international investors wanting to initiate or add to positions in equity markets across Europe

JONES Rob.jpg

Robert Jones 
Senior Portfolio Manager

 

Scott Meech_okpress.jpg

Scott Meech 
Senior Portfolio Manager

 


Attractive buying levels for credit in Europe

The fixed-income scenario has not fundamentally changed following the referendum result. "Although the outcome was unexpected, markets traded in an orderly fashion," according to Christel Rendu de Lint, head of fixed income. "At the moment, we need to distinguish clearly between what could be seen as the start of a global recession (which we do not expect to happen) and a bias towards moving into assets seen as less risky, such as sovereign bonds."

The market correction that followed the Brexit vote created attractive buying levels for credit bonds, especially since the probability of default has not increased significantly in the asset class. Although volatility will remain elevated, causing a slight increase in risk premiums, no major adverse developments are expected in the credit market unless other long-standing EU member-states also start talking about exit referendums. UBP's central strategy and favoured sectors have not changed significantly since the referendum: "we are continuing to identify the positive medium- to long-term fundamentals of each investment, and we are looking for attractive carry and risk/return profiles that will enable us to maintain maximum liquidity while actively managing risk," said Christel Rendu de Lint.

RENDU DE LINT Christel.jpg

Christel Rendu de Lint
Head of Fixed Income

 


Disclaimer

This document is a marketing document and reflects the opinion of Union Bancaire Privée, UBP SA, (therafter UBP) as of the date of issue. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it directed to any person or entity to which it would be unlawful to direct such a document This document has not been produced by UBP’s financial analysts and is not to be considered as financial research. Reasonable efforts have been made to ensure that the content of this document is based on information and data obtained from reliable sources. However, UBP has not verified the information in this document and does not guarantee its accuracy or completeness. UBP accepts no liability whatsoever and makes no representation, warranty or undertaking, express or implied, for any information, projections or any of the opinions contained herein or for any errors, omissions or mistatements. The information contained herein is subject to change without prior notice. UBP gives no undertaking to update this document or to correct any inaccuracies it it which may become apparent. Past performance is no guarantee for current or future returns and an investor may consequently get back less than he/she invested. This is a marketing document and is intended for informational and/or marketing purposes only. It should not be construed as advice or any form of recommendation to purchase or sell any security. It does not replace a prospectus or any other legal documents that can be obtained free of charge from the registered office of a fund or from UBP. The opinions herein do not take into account individual investors’ circumstances, objectives, or needs. Each investor must make his/her own independent decision regarding any securities or financial instruments mentioned herein and should independently determine the merits or suitability of any investment. Investors are invited to read carefully the risk warnings and the regulations set out in the prospectus or other legal documents and are advised to seek professional advice from their financial, legal and tax advisors. The document neither constitutes an offer nor a solicitation to buy, subscribe for or sell any currency, product or financial instrument, make any investment, or participate in any particular trading strategy. This document is confidential and is intended only for the use of the person to whom it was delivered. This document may not be reproduced (in whole or in part) or delivered to any other person without the prior written approval of UBP. Telephone calls to the telephone number stated in this presentation are recorded. When calling this number, UBP will assume that you consent to this recording. UBP is authorised and regulated in Switzerland by the Swiss Financial Market Supervisory Authority and is authorised in the United Kingdom by the Prudential Regulation Authority. UBP is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority.

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Market insight 16.02.2018

US consumer confidence surprised to the upside, UK retail sales broadly flat

US: Consumer confidence (Michigan) (Feb P): 99.9 vs 95.5 expected (prior: 95.7)

  • Current conditions: 115.1 vs 111.1 expected (prior: 110.5)
  • Expectations: 90.2 vs 87.2 expected (prior: 86.3)
  • The press release states that negative references to stock prices were spontaneously cited by just 6% of all consumers. Instead, favorable perceptions of the tax reforms dominated.
  • All in all, consumers still appear to be in strong shape to boost their spending again over the coming months.

 

US: Import price index (Jan): 1% m/m vs 0.6% expected (prior: 0.2% revised from 0.1%)

  • On a y/y basis: 3.6% vs 3% expected (prior: 3% revised from 3.2%)
  • Headline was driven by a surge in imported petroleum prices (+4.3% m/m).
  • Within non-petroleum imported prices, the bulk of the increase came from industrial supplies (+3.1% m/m), while prices of capital goods and autos recorded only modest growth.

 

US: Housing starts (Jan): 1326k vs 1234k expected (prior: 1209k revised from 1192k)

  • On a y/y basis: 9.7% vs 3.5% expected (prior: -8.2% revised from -6.9%)
  • Building permits: 1396k vs 1300k expected (prior: 1302k revised from 1300k); 7.4% m/m vs 0% expected (prior: -0.1% revised from -0.2%)
  • While the volatile multi-family category led the increase, single-family starts rose as well.

 

UK: Retail sales (Jan): 0.1% m/m vs 0.5% expected (prior: -1.4% revised from -1.5%)

  • On a y/y basis: 1.6% vs 2.5% expected (prior: 1.4% revised from 1.5%)
  • Ex autos: 0.1% vs 0.6% expected (prior: -1.6% revised from -1.5%); 1.5% y/y vs 2.4% expected (prior: 1.3%)
  • Retail sales growth was broadly flat at the beginning of the New Year with the longer-term picture showing a continued slowdown in the sector.
Market insight 15.02.2018

Rising core PPI and disappointing industrial production in the US

US: PPI (Jan.): 0.4% m/m as expected (prior: 0.0% revised from -0.1%)

  • PPI y/y: 2.7% vs 2.4% expected (prior: 2.6%)
  • Core PPI: 0.4% m/m vs 0.2% expected (prior: -0.1%); 2.2% y/y vs 2.0% expected (prior: 2.3%)
  • The annual increase in core PPI is close to a 6-year high, which partly reflects the upward pressure on import prices from the weaker dollar and provides further evidence that inflationary pressures are set to build this year.

US: Industrial production (Jan.): -0.1% m/m vs 0.2% expected (prior: 0.4% revised from 0.9%)

  • Manufacturing production was flat m/m (vs 0.3% expected) and previous readings were revised slightly lower.
  • Except the 0.6% m/m rise in utilities output, which was due to the unseasonably cold temperatures in some regions, the weakness in January was broad-based.
  • Along with the weaker retail sales data released yesterday, this report provides further evidence that economic growth may (yet again) disappoint in Q1.

US: Philadelphia Fed. (Feb.): 25.8 vs 21.8 expected (prior: 22.2)

  • Unexpected increase with a solid rise in new orders, in employment but also in prices paid.

US: Empire manufacturing (Feb.): 13.1 vs 18.0 expected (prior: 17.7)

  • New orders slightly increased while employment and prices paid rose more meaningfully.
  • These two regional surveys confirms that manufacturers continue to be optimistic for the economic activity.

US: Initial jobless claims (Feb. 10): 230k vs 228k expected (prior: 223k revised from 221k)

US: NAHB housing market index (Feb.): 72 as expected (prior: 72)

  • Homebuilders' confidence remains close to the highest level since 1999.
  • The measure on the 6-month outlook reached its highest since 2005.

Russia: Industrial production (Jan.): 2.9% y/y vs -0.5% expected (prior: -1.5%)

 

Market insight 14.02.2018

US: higher inflation and lower retail sales than expected

US: CPI (Jan.): 0.5% m/m vs 0.3% expected (prior: 0.2% revised from 0.1%)

  • Yearly trend on headline inflation was stable at 2.1% y/y; core inflation was up by 0.3% m/m (vs 0.2% m/m expected and in prior month; stable at 1.8% y/y).
  • Energy (3% m/m), apparels (1.7% m/m; related to import prices) and services (0.3% m/m) were responsible for the monthly rebound.
  • Outlook on inflation points towards a rising trend; after moderate yearly trend in Q1, headline inflation should be close to 3% y/y in Q2, and core CPI above 2% y/y according to our scenario. 2018 average headline inflation should now reach 2.5% y/y and core inflation 2.2% y/y.
  • This argues in favor of regular rate hikes from the Fed in Q1 and Q2-18, and in favor of 4 rate hikes this year.

 

US: Retail sales (Jan.): -0.3% m/m vs 0.2% expected (prior: 0% revised from 0.4%)

  • Core sales were flat (0.4% m/m expected) and past month data were revised from 0.4% m/m to 0% m/m.
  • Bad weather conditions and a pause after strong Q4 data partly explained the negative surprises on sales.
  • Purchases on several items have reversed from the past two months (autos, building materials and electronics); non-store sales were flat after 0.5% m/m.
  • Too early to see in these volatile data a reversal in US scenario, as supports should continue from the heathy labor and some fiscal easing.

 

US: Business inventories (Dec.): 0.4% m/m vs 0.3% expected (prior: 0.4%)

  • Inventories have increased (notably ex-autos); but sales were still dynamic (0.6% m/m).

 

Eurozone: Industrial production (Dec.): 0.4% m/m vs 0.1% expected (prior: 1.3% revised from 1%)

  • Except capital goods, momentum in production was positive for all major sectors.
  • Yearly trend has reached 5.2% y/y, comparable to the high pace in activity reached before the crisis.

 

Germany: GDP (Q4-17): 0.6% q/q as expected (prior: 0.8%)

  • Growth has been strong at year end; Eurozone GDP has also been confirmed up by 0.6% q/q in Q4-17.

 

Germany: CPI (Jan.): -1% m/m as expected (prior: 0.6%)

  • Rising oil and food prices, while prices for leisure and clothes have weakened.
  • Yearly trend has moderated from 1.6% y/y to 1.4% y/y.

 

Italy: GDP (Q4-17): 0.3% q/q as expected (prior: 0.4%)

  • GDP was up by 1.6% y/y (1.7% y/y in Q3-17); Italy is under a progressive recovery, but it remains fragile.

 

Poland: GDP (Q4-17): 1% q/q vs 1.2% expected (prior: 1.2%)

  • Activity was on an accelerating trend (5.1% y/y after 4.9% y/y in Q3-17).

 

Turkey: Current account (Dec.): -7.7bn USD vs -7.5bn expected (prior: -4.38bn revised from -4.2bn)

  • Rising imports and weaker exports have increased trade and current account deficits.

Altro da leggere

Market insight 16.02.2018

US consumer confidence surprised to the upside, UK retail sales broadly flat

US: Consumer confidence (Michigan) (Feb P): 99.9 vs 95.5 expected (prior: 95.7)

  • Current conditions: 115.1 vs 111.1 expected (prior: 110.5)
  • Expectations: 90.2 vs 87.2 expected (prior: 86.3)
  • The press release states that negative references to stock prices were spontaneously cited by just 6% of all consumers. Instead, favorable perceptions of the tax reforms dominated.
  • All in all, consumers still appear to be in strong shape to boost their spending again over the coming months.

 

US: Import price index (Jan): 1% m/m vs 0.6% expected (prior: 0.2% revised from 0.1%)

  • On a y/y basis: 3.6% vs 3% expected (prior: 3% revised from 3.2%)
  • Headline was driven by a surge in imported petroleum prices (+4.3% m/m).
  • Within non-petroleum imported prices, the bulk of the increase came from industrial supplies (+3.1% m/m), while prices of capital goods and autos recorded only modest growth.

 

US: Housing starts (Jan): 1326k vs 1234k expected (prior: 1209k revised from 1192k)

  • On a y/y basis: 9.7% vs 3.5% expected (prior: -8.2% revised from -6.9%)
  • Building permits: 1396k vs 1300k expected (prior: 1302k revised from 1300k); 7.4% m/m vs 0% expected (prior: -0.1% revised from -0.2%)
  • While the volatile multi-family category led the increase, single-family starts rose as well.

 

UK: Retail sales (Jan): 0.1% m/m vs 0.5% expected (prior: -1.4% revised from -1.5%)

  • On a y/y basis: 1.6% vs 2.5% expected (prior: 1.4% revised from 1.5%)
  • Ex autos: 0.1% vs 0.6% expected (prior: -1.6% revised from -1.5%); 1.5% y/y vs 2.4% expected (prior: 1.3%)
  • Retail sales growth was broadly flat at the beginning of the New Year with the longer-term picture showing a continued slowdown in the sector.
Market insight 15.02.2018

Rising core PPI and disappointing industrial production in the US

US: PPI (Jan.): 0.4% m/m as expected (prior: 0.0% revised from -0.1%)

  • PPI y/y: 2.7% vs 2.4% expected (prior: 2.6%)
  • Core PPI: 0.4% m/m vs 0.2% expected (prior: -0.1%); 2.2% y/y vs 2.0% expected (prior: 2.3%)
  • The annual increase in core PPI is close to a 6-year high, which partly reflects the upward pressure on import prices from the weaker dollar and provides further evidence that inflationary pressures are set to build this year.

US: Industrial production (Jan.): -0.1% m/m vs 0.2% expected (prior: 0.4% revised from 0.9%)

  • Manufacturing production was flat m/m (vs 0.3% expected) and previous readings were revised slightly lower.
  • Except the 0.6% m/m rise in utilities output, which was due to the unseasonably cold temperatures in some regions, the weakness in January was broad-based.
  • Along with the weaker retail sales data released yesterday, this report provides further evidence that economic growth may (yet again) disappoint in Q1.

US: Philadelphia Fed. (Feb.): 25.8 vs 21.8 expected (prior: 22.2)

  • Unexpected increase with a solid rise in new orders, in employment but also in prices paid.

US: Empire manufacturing (Feb.): 13.1 vs 18.0 expected (prior: 17.7)

  • New orders slightly increased while employment and prices paid rose more meaningfully.
  • These two regional surveys confirms that manufacturers continue to be optimistic for the economic activity.

US: Initial jobless claims (Feb. 10): 230k vs 228k expected (prior: 223k revised from 221k)

US: NAHB housing market index (Feb.): 72 as expected (prior: 72)

  • Homebuilders' confidence remains close to the highest level since 1999.
  • The measure on the 6-month outlook reached its highest since 2005.

Russia: Industrial production (Jan.): 2.9% y/y vs -0.5% expected (prior: -1.5%)

 

Market insight 14.02.2018

US: higher inflation and lower retail sales than expected

US: CPI (Jan.): 0.5% m/m vs 0.3% expected (prior: 0.2% revised from 0.1%)

  • Yearly trend on headline inflation was stable at 2.1% y/y; core inflation was up by 0.3% m/m (vs 0.2% m/m expected and in prior month; stable at 1.8% y/y).
  • Energy (3% m/m), apparels (1.7% m/m; related to import prices) and services (0.3% m/m) were responsible for the monthly rebound.
  • Outlook on inflation points towards a rising trend; after moderate yearly trend in Q1, headline inflation should be close to 3% y/y in Q2, and core CPI above 2% y/y according to our scenario. 2018 average headline inflation should now reach 2.5% y/y and core inflation 2.2% y/y.
  • This argues in favor of regular rate hikes from the Fed in Q1 and Q2-18, and in favor of 4 rate hikes this year.

 

US: Retail sales (Jan.): -0.3% m/m vs 0.2% expected (prior: 0% revised from 0.4%)

  • Core sales were flat (0.4% m/m expected) and past month data were revised from 0.4% m/m to 0% m/m.
  • Bad weather conditions and a pause after strong Q4 data partly explained the negative surprises on sales.
  • Purchases on several items have reversed from the past two months (autos, building materials and electronics); non-store sales were flat after 0.5% m/m.
  • Too early to see in these volatile data a reversal in US scenario, as supports should continue from the heathy labor and some fiscal easing.

 

US: Business inventories (Dec.): 0.4% m/m vs 0.3% expected (prior: 0.4%)

  • Inventories have increased (notably ex-autos); but sales were still dynamic (0.6% m/m).

 

Eurozone: Industrial production (Dec.): 0.4% m/m vs 0.1% expected (prior: 1.3% revised from 1%)

  • Except capital goods, momentum in production was positive for all major sectors.
  • Yearly trend has reached 5.2% y/y, comparable to the high pace in activity reached before the crisis.

 

Germany: GDP (Q4-17): 0.6% q/q as expected (prior: 0.8%)

  • Growth has been strong at year end; Eurozone GDP has also been confirmed up by 0.6% q/q in Q4-17.

 

Germany: CPI (Jan.): -1% m/m as expected (prior: 0.6%)

  • Rising oil and food prices, while prices for leisure and clothes have weakened.
  • Yearly trend has moderated from 1.6% y/y to 1.4% y/y.

 

Italy: GDP (Q4-17): 0.3% q/q as expected (prior: 0.4%)

  • GDP was up by 1.6% y/y (1.7% y/y in Q3-17); Italy is under a progressive recovery, but it remains fragile.

 

Poland: GDP (Q4-17): 1% q/q vs 1.2% expected (prior: 1.2%)

  • Activity was on an accelerating trend (5.1% y/y after 4.9% y/y in Q3-17).

 

Turkey: Current account (Dec.): -7.7bn USD vs -7.5bn expected (prior: -4.38bn revised from -4.2bn)

  • Rising imports and weaker exports have increased trade and current account deficits.