It’s been a busy few weeks and there are four things that companies and investors are grappling with right now.
First, in the UK, we’ve seen yet another Prime Minister installed at No.10. After a significant bout of bond market volatility, financial markets seem relieved, at least for now. We seem to be heading towards a new era of austerity – with the prospects of tax hikes and spending cuts on the horizon.
According to some reports, the new team would like a 50:50 split between tax increases and spending cuts. For context, after the Financial Crisis in 2008, then Chancellor George Osborne apparently favoured an 80:20 split, with more spending cuts and smaller tax hikes. Even if financial markets appear calmer, we still look set for a challenging period in the UK over the next few quarters.
Second, it’s earning season in the US. There were concerns that corporate earnings would be weak. They were, but still perhaps better than some had feared, and we’ve seen some sense of relief in equity markets in October. European companies also showed some resilience, partly helped by a weaker currency that boosted overseas earnings. While the quarter has been better than feared, we do continue to see expectations drift lower as analysts factor in the impact of lower economic activity.
Third, we’ve seen the 20th Congress of the Chinese Communist Party confirm Xi Jinping for an unprecedented third term in power as General Secretary. On the whole, the focus has been more on control than on growth. That may prove challenging for risky assets in China, although when you look at the challenges in the real estate sector, where some consumers are boycotting mortgage payments as developers struggle to complete new builds, you’d argue that more financial discipline would be a positive.
Finally, inflation has remained stubbornly high and Central Banks continue to hike rates. We expect this trend to continue, although markets haven’t really changed their view over the past few weeks of where policy rates will peak. We’d expect to see inflation begin to weaken over the coming months, but it’s proving a slow process.
So, we expect to see a challenging economic environment over the next few months, but generally companies appear to be managing quite well and starting valuations look quite appealing versus what they were historically, particularly for those with a longer-term outlook. So bargains can be found!
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