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Equity & Investment Strategy ResearchEquity & Investment Strategy Products: Investment Strategy Weekly, Asset Allocation Quarterly, Politics & Themes, Surveys.
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Three Cuts and a Trade Deal Fuel Dreams of Recovery
• Monetary easing and hopes of a trade deal are fuelling a Q4 rally
• But the economic environment remains clouded, the liquidity boost is insubstantial and market dynamics are mixed at best
• Investors are ignoring the recession risks already evident in earnings• We doubt that this rally can persist.
• Two key UK political tail risks have been greatly reduced
• Risks of a ‘no deal’ Brexit or an outright Labour majority have receded
• The chances of a softer version of Brexit, or no Brexit at all, have risen
• We answer 12 frequently asked questions on UK politics
The Mood Music Improves …
• The mood music in the markets has improved in recent weeks.
• Geopolitical uncertainty has lifted. Hope has grown of a partial/interim US-China trade deal this November. The risks of a “No Deal” Brexit have receded for now.
• Most importantly, global monetary policy has been eased. Over half the world’s Central Banks have cut rates this year; the ECB and the Fed have begun to expand their balance sheets again; and the BoJ is expected to ease policy at the month-end.
• If this year’s slowdown is just the result of a series of temporary supply-chain disruptions, aggravated by US-China tariff uncertainty, then it would appear to be too early to be positioned for recession.
But We Think the Problems are More Deep-seated
• But we believe that investors and policymakers have still to get to grips with a series of monetary policy misjudgements that began in 2018. Until these are recognised, the risk of a US recession remains high.
• For us, the risks don’t go away until we see a material easing of monetary policy by the Fed … not just ‘insurance’ cuts.
• However, what is currently missing from our more bearish narrative is a full-scale corporate cash-flow crisis that morphs into an external-funding crisis. We have the ingredients (levered corporate balance sheets, margin pressure, and negative earnings growth) but lack the catalyst.
Fifteen Critical Charts that Frame our Thinking
• In this report review 15 of the charts that have framed our Risk-Off stance, and convinced us that this slowdown is more than a series of short-term supply-chain disruptions.
• Short-term risk of a ‘no deal’ Brexit is likely off the table
• But new deal lays ground for a distant UK-EU economic relationship
• An extension still seems likely, possibly followed by an election
• Cashflow is Strongly Related to ISM and Economic Cycle
• Record US Cashflows fully Allocated to Capex, Dividends & Buybacks
• Little Headroom if they fall. Already Buybacks being Cut Back
• Cash Burn stocks could be forced to Prioritise Cashflow over Growth
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