FTSE Forecast; Brexit Supports, World Economy Undermines

It is that time of the month when we ritually kick ourselves for making what turned out to be a stupid forecast six months ago – and then, without learning from our mistakes – we go on to make a crazy forecast for where FTSE will be in another half year.

Will go up, will go down, but not necessarily in that order

BUT this time, we weren’t so far wrong. Back on 15 April, we had failed to leave the EU on the second deadline, and a new exit-date of 31 October had been decreed. Wisely, or perhaps by luck, we guessed that on 15 October, Brexit might not be established, or the future might be rather worrying. Quote “So we will work on the basis that Brexit is still on-going by October.

Our forecast for 15 October was 7600, quite a reduction from the 8150 we had been predicting for September. Thus, we got the direction right, and a close of 7212 is pretty accurate by our standards.

The Next Six Months

Now for the next six months. British politics are somewhat unpredictable. We think that Boris might just pull it off and squeeze Brexit through tomorrow. The country (or at least 52%) will rejoice….. so there is no way the opposition will allow an election if Brexit goes ahead. Thus our central forecast is that Brexit happens, but then the minority government struggles on for several months until the demand for an election is overwhelming. This could easily be around our forecast date of 15 April 2020. However, a Brexit Deal will create an optimism and gentle release of pent up demand to support the UK economy over the next six months.  Lack of Government interference with new laws will also help!

However, no country is an island. Okay, well some countries are islands. Malta comes to mind. But economically, the future of UK based businesses, with our new, outward looking trade policy, cannot be but affected by the world economy. We foresaw the potential of a recession by year end, and the data published since then has done nothing to change that view. The global economy, from US to China to EU (in that order) is definitely looking soft.

Where does that leave us?

The UK domestic economy should have a surge, this will be countered by weak global growth.

Re-rating

The UK stockmarket, is at rather low multiples of income, given the interest rate environment. This morning, www.dividenddata.co.uk quotes the FTSE100 yield at 4.53%. If / When Brexit is settled, we see scope for yield compression – and hence price rises – justified by the reduced uncertainty and risk.

In summary, we think UK growth will be supportive, global economics will undermine, but an extra boost will be given by removal of the Brexit factor. From a close yesterday of 7182, we see FTSE100 at 7600 on 15 April. This is an increase from the 7200 we expected for Jan – Mar next year.

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FTSE 100 Forecast Flat Until March 2020

It is that time for us to kid ourselves that we have some insight of where FTSE is heading over the next six months. “Hurrah,” I hear you cry, “we’ve been waiting for a laugh.”

FTSE over 6 months

But first let’s have some humiliation by looking at what we foresaw back in March 2019. Back on 18 March, we confidently thought that Brexit would be resolved on 29 March. Oh how naïve we were. We thought that either a deal would be done, or no deal would be all sorted by September. Either way, we thought that resolution of Brexit would be supportive for FTSE, and so, with FTSE at 7228, we forecast 8150. The article was entitled “UK Equities About to Soar.” Wow, how confident we were. Sadly, our central assumption over Brexit was wrong, and so the out-turn of 7345 on 16 September was much lower. As we noted before, forecasting is particularly difficult when it involves the future (Ed; and as I remarked at the time, what other kind of forecasting is there? Now get on with it).

Market Screen

Looking forward to Monday 16 March 2020, what do we see? As noted last month, we see some risk of a global slow-down. And we have said this before, but surely by March, Brexit will be settled? The potential outcomes are;-

a) Deal on 31 October

b) No deal on 31 October

c) Extension to January, then Deal or No Deal

d) Revoke Article 50

Thus we feel that Brexit may well be off the scene. To some extent it will be hedged anyway, as a bad Brexit might lead to a lower GBP, which tends to support FTSE through the foreign earnings route.

Though we could have a Marxist/SNP/whatever coalition government too!

However Brexit is solved, we see it too soon to have a kick-start effect on the UK economy by March, and globally, we still see the risks on the downside. Therefore, we think the on-going global slowdown is bad for equities, but some kind of resolution of Brexit should help the UK market (dear God, any kind of closure, please, we implore you).

Thus for 16 March 2020, we forecast FTSE 100 at 7200. Yes, I know that is the same level we have forecast for December 2019, January 2020, and February 2020. At least we are consistent!

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FTSE Weak Until Christmas – Then Rebounds in the New Year

It’s that time of the month when we take out our crystal ball and forecast where FTSE 100 will be in 6 months time, February 2020.

Stock Prices green for up, but we think down

Before giving away too many of our thoughts, gut-feels and sheer guesses, let’s look at where we are now. Six months ago, in February this year, we thought FTSE would continue the upward trajectory sine the start of 2019, Brexit would have been and gone, and FTSE would be just over 8000. What’s actually happened is that Brexit was postponed and so the UK economy has been left dithering over the summer. Last night it closed at 7148. So we got the direction right. At the end of last month, when it was at 7700, we could have forgiven ourselves a little smugness.

FTSE 100 with date of forecast shown

For the last three months, as the implications of the Brexit delay became apparent, we have been forecasting FTSE up to 7500 in July, and then a retreat to 7200 by November. Well, we got to 7500 in July, but back down to 7200 a little early. Our suggestion last month that the market was riding high but vulnerable to bad news was brought to life by President Trump’s step up of the tariff war with China.

So where to now?

As we noted last month, the global economy looks weak, and the UK could be in a technical recession by Christmas. (See our article last week, A Bleak Midwinter Brexit Recession By Christmas) Our central forecast for Brexit is that it will be a soft No-Deal, in that another Withdrawal Agreement will not be reached, but enough accommodations will be made to keep things ticking over. This outcome will scare the market further.  However, FTSE tends to look 6 months ahead, and by February, it should become clear that the UK economy will be okay, and the world economy could be over its wobble.

So we think the worries of a No Deal will send FTSE down to 6800 by November, but that in the 6 month time horizon of our forecast, we think it will be back to 7200 by Friday 14 Feb 2020

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FTSE Forecast for January is…….. LOWER!

We’ve been forecasting FTSE100 with a six month timeframe for six months. Which means, oo-er, that we have just reached the outcome of our first prognostication.

Stock Prices green for up, but we think down

The best traditions of economic forecasting is to make the call, try to write some eye-catching blurb – and then MOVE ON, and never re-visit. After all, what is to be gained by checking on whether the forecasts were correct? Sooner or later, the call will be just ridiculously incorrect, which will make the author look stupid. And at other times, it will be spot on, so the writer then starts making hubristic comments about their skill (even though everyone knows it was only luck), and so still looks stupid.

However, one of our many maxims is “You can’t tell stupid”.

FTSE over the last year, with date of forecast shown

And so here goes with our review of January 2019’s forecast. At the time, FTSE was in the doldrums, having fallen for six months. When we made our forecast, it was 6855. We foresaw a reversal, and a strong climb to 8050. Well, we got the change of direction correct. Last night it closed at 7532. So it didn’t climb quite as far as we expected. Blame Brexit for that. The whole world seems to be using Brexit as the catch-all excuse for any under performance, so there is no reason LondonMarketComment can’t do the same! We thought that one way or another, it would be resolved by now and we could all get on with the more interesting parts of our lives. Anyway, we award ourselves 7 out of ten for that call.

The New Forecast.

We’ve been saying for a couple of months that we saw FTSE100 up to 7500 in July, and then a fall to 7200 by November. We got the 7500 right. We now say that the 7200 of November continues into January.

Why do we say this? Right now, the stockmarket has it’s positive head on. Bad Non-Farm Payrolls for May were taken positively. We understand the logic of a weak economy making interest rate rises less likely….. but, er, doesn’t that same weak economy make it harder for companies to make money? Subsequently, the June NFP came in much stronger – but that didn’t dent market sentiment either. So the market is a bit blinkered.

Meanwhile, we can all see risks to the global economy. Nobody knows where the US/China tariffs-that-are-really-strategic-politics will end. Trump and Xi Jinping both need to win this battle of wills. Meanwhile, Europe is catching a cold from Chinese hesitancy. The middle east could blow up (though we don’t foresee that). Oh, and last – and probably least – there is Brexit.

In conclusion, the market is in happy mode, but there are plenty of potential threats over the next six months. A downside surprise feels likely. So we see FTSE struggling to go higher, with a dip due by year end and no climb in January. Doom doom doom!

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FTSE to Rise and Fall over Summer and Autumn 2019

Yes yes, we know about the old forecast that FTSE will go up and down, but not necessarily in that order!

Prices going up!

Only this time, we think it will be like that.

Here’s why. A) Fundamentals

Long-term stockmarket moves are driven by fundamentals. Thus in the long-run, share prices are a function of corporate earnings and interest rates. Corporate earnings are what inspires share purchases, and so over time, the higher the earnings, the higher share prices will be. Interest rates have three effects. As an alternative to share purchases, bonds provide a benchmark against which dividends can be measured. There is a second, more subtle outcome from interest rate changes. Bond yields are used as the discount rate applied to future company earnings to give them a value today. Hence higher rates mean that future earnings appear less tempting today. It is also thought that companies are generally borrowers, and so higher rates will reduce profits. So by all three measures, higher interest rates lead to lower share prices.

Here’s why. B) Market Noise

Our Hero, Benjamin Graham

We are all familiar with what the fabulous Benjamin Graham called Mr Market. (If you are not familiar, minimise this article and google it straightaway, right now, without delay). Mr Market reacts to chitter-chatter, market data and political developments, becoming overly optimistic, or excessively pessimistic. Many of these inputs are essentially unpredictable – but not all of them!

Here’s why. C) Momentum

There is also the matter of market momentum. Once it starts moving in a positive or negative direction, the market gets the wind in its sails and tends to keep going. Hence the famed capacity for the market to overshoot.

Our chosen time frame for market prediction is 6 months. This was designed to be like a bridesmaid’s dress – long enough to cover the essentials but short enough to keep you interested. We feel that 6 months is long enough for Fundamentals to have an effect, for predictable Market Noise to be included and for Momentum to have not reversed.

On to the Predictions for 6 months time, Friday 13 December 2019!

We do actually see the markets going up, then down, as per our intro! The going up is down (see what I did there) to slightly softer fundamentals (world economic slowdown), initially being outdone by the excitement of a new PM with new policies over Brexit and other minor matters. However, we then see moves down, down to Brexit reality (and maybe No Deal).

Last time, in May, we advised Go away at the end of July, come back in mid-November”, forecasting a rise into July and then a fall back to 7200 by 15 November. The events of the last 4 weeks have done nothing to change that view. Today, FTSE is at 7351. By mid December, we see it stuck at 7200, having been up to 7500 in July, but brought down by soft fundamentals and Brexit uncertainty.

Good Luck!

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FTSE100 Forecast. Don’t Come Back on St Leger Day

The economy seems to keep motoring along, both here and in the US (which drives so much of the world GDP). And yet….. and yet…… and yet, everyone is fearful because of the politicians.

Will May ever go? Will the Brexit uncertainty ever end? Will Trump’s trade war on China undo last year’s tax boost (which was fading anyway)? And didn’t we just call a peak in the latest tech bubble (as signalled by Uber being over-hyped)?

However, the underlying economics are okay, and we see corporate earnings remaining good. But the fear-factor in the UK market is there.

This forecast covers the period to 15 November, so yet again we find ourselves caught in the Brexit will it/won’t it uncertainty. Our expectation (see tomorrow) is that a hard Brexit on 31 October remains a possibility, and this will cause some turmoil in the stock market. In this case, the word ‘turmoil’ has the additional meaning of ‘buying opportunity’.

FTSE positive so far this year

Today FTSE100 is at 7247. We see slow growth upwards over the summer, but softness in September and October due to the politics. Thus, our forecast for FTSE100 on 15 November is 7200.

The old saw says to go away in May and come back on St Leger Day (14 September). We can’t see much joy in buying into the Brexit uncertainty, so we advise “Go away at the end of July, come back in mid-November”. Doesn’t scan as well does it?

Invest in fun not shares

This is more pessimistic than we have been in a while, (see our previous forecasts) but hey ho, sun’s out, surf’s up, life is good eh?

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[The End of May]2

Oh those happy, naïve, days back in January, where we were asking How Long Can The Brexit Fun Last? We thought 3 or 4 weeks would be the most we could stretch it out. And now, 4 months later, we foresee another 18 months of this disaster. Was there ever a slower car-crash?????

Here’s why;

  1. Mrs May’s deal is dead in the water. It is more Zombie’d than a Zombie-thing. Even though there is less than the thickness of a fag-paper (which is approx 2 thou’) between the reds and blues, they cannot agree a deal.

    Mrs May
  2. And even if they do agree a deal, it won’t get through Parliament – either it has a customs union, which will lose more Tory support than it gains from Labour, or it doesn’t have a customs deal – in which case Labour won’t back it.

  3. Both lots will receive an even larger drubbing in the European Elections on 23 May than they suffered in the local council elections

  4. So there can be no general election – all those turkeys in Parliament still won’t vote for Christmas. But Mrs May will finally have to admit defeat!

  5. So the only solution is a new Tory leader. On the over-riding need to win the next election, it will be BoJo or Liz Truss………….

    Johnson and Truss in an appropriate setting (photo from Nursery Times)
  6. ………..who will then inform Messrs. Barnier, Juncker and Tusk that they negotiated too tough a deal, and that it will never pass Parliament.

  7. Hence the EU must choose – another 12 months to negotiate a deal that is fair to UK, or No-Deal on 31 October.

  8. The EU will huff and puff, but back down. It doesn’t want to be blamed for No-Deal

 

You heard it here first;-

The End of May by the End of May

Brexit Delayed until 31 October 2020

Now can we all get on with our lives?  Er, no. We have all the drama of the Euro Elections, the Peterborough By-election, a Tory leadership election, and Brexit Delay. The fun clearly has months to run!

PS. Did you like the Quant-joke in the headline?

[The End of May]2 = [The End of May] * [The End of May] = The End of May BY The End of May

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Sterling Currency Forecasts. The World is More Important Than Brexit.

Market Screens are Green

Last month, back in those happy days when we believed Brexit would be sorted by the end of March – Yep, we were writing on 26 March – we made our GBP forecasts on the basis that No Deal would provoke a bit of a dip, whilst No Brexit would have a slight spike, but in either scenario, sterling would end up stronger against USD and EUR.

Jean-Baptist Alphonse Karr looking very Victorian

Jean-Baptiste Alphonse Karr said plus ça change, plus c’est la même chose.

Things have changed over the last 3 weeks – but still they are the same. We continue to not know what is happening with Brexit. We could be heading for a No Deal at the end of October, we could be getting Mrs May’s Deal approved (though it seems unlikely), or we could be having a new Tory PM and a bit of re-negotiation.

Whatever happens, we feel that the UK economy will continue to motor along okay, with investment decisions increasingly being taken anyway. Life goes on eh? The UK data seems to indicate that this is occurring, with strong employment and wages data, and quiet inflation.

US Non-Farm Payrolls were 196,000 in March, which matches our “decent level target” of 200,000. China seems to be stabilising its recent weakness. So it is only Europe skating on the thinnest of economic ice.

So whilst we see GBP strength still, it will not be as robust as we thought – until Brexit is fully resolved. Thus, in 6 months time, we see GBPUSD rising from today’s 1.30 to 1.38 (forecast down from 1.42). However, there is a serious risk of weakness in the EU area, so we still see EUR weaker against GBP. As last month, we expect EURGBP to fall from 0.8680 today down to 0.8200 in 6 months time regardless of the B-mess.

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FTSE100 Forecast Lowered By Brexit Delay

The uncertainty over Brexit goes on – and so our FTSE Forecast goes down.  We are promised that 31 October is a hard deadline – er haven’t we heard that before?

 

Market Screens are Green

For the last three months, we’ve been working on the idea that in each case Brexit would be over and done within the 6 months of our forecast.  For that to happen this time, we have to believe that Mrs May can get her deal approved at the 4th time of trying.  So we will work on the basis that Brexit is still on-going by October.

 

What else do we see?  The US economy looks a little fragile, which is not fully priced in.  Europe looks very fragile.  China continues to kick the debt-can down the road.  (Is a debt-can like a petrol-can, but potentially more explosive?) But of course weaker economies mean no interest rate rises. Oil is being bid higher, but not in a way that threatens inflation taking off.

 

We don’t see earnings crashing in US, so we continue to think shares will trend slowly higher – but the UK market will not do as well as it would have done had Brexit been resolved one way or another.

 

Previously, we saw FTSE100 at 8050 for July and August and 8150 in September.  See our articles here. However, we think that the 50% move towards those levels is as far as it is going.  This morning, FTSE is 7442. For October, we forecast FTSE100 at 7600.

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UK Equities about to Soar

Well it is that time of the month to make a 6 month forecast for FTSE100.

Prices going up!

The table below summarises our forecasts so far this year.  We note that our target date 6 months hence is 16 September 2019.  Which, of course is the Monday after the St Leger’s Day meeting at Doncaster.  So we expect the market to be very well bid – by all the people who went away in May – and missed the huge summer rally.

William Hill St Leger Festival – St Leger Day

So what do we know will happen between now and St Leger’s Day?  Well the real economy does seem to be in a soft patch in the UK, and is also slowing in all the main world economic drivers.  The EU is flirting with recession (ha, does that mean it has its come-hither eyes and is flicking its hair?)  China appears to have softened but isn’t heading for a blow-up.  Even the US seems to be losing some of the sugar-rush from last year’s tax cuts.  So, looking on the bright-side, it feels like interest rate rises are off the agenda everywhere, which will keep the relatively high yields from shares looking attractive. FTSE100 is yielding 4.46 as of today – from dividenddata.co.uk.

 

So what else is there that could possibly affect UK share prices coming up this summer?  Anything in the world of politics?

 

Oh yes, well there is Brexit!  It may seem an odd thing to say, but slowly the muddy water in our crystal ball is settling like the flakes in a snow-shaker dome. I love to mangle a metaphor.

 

We’ll review the Brexit alternatives tomorrow, but to summarise, by September we’ll either have left, be in a transition period of Mrs May’s Deal, or be in a long postponement. So in all cases the immediate threat to UK equities will have disappeared.

 

Under all of those scenarios, hopefully the stock market can get back to doing what it does best – ignore the real world and live by rumour and counter-rumour.

So we continue to believe that the late spring will bring a relief rally to UK equities.  Anyone who leaves it until St Leger’s Day will have missed the boat.

We forecast that on 16 September, FTSE will close at 8150.

 

Now this is really more foolhardiness that most economists show, but here are our forecasts so far this year;

Date of Forecast               FTSE Then           Date for Forecast             FTSE Forecast

15 January 2019                6855                       15 July 2019                        8050

12 February 2019              7129                       15 August 2019                  8050

18 March 2019                   7228                       16 September 2019         8150

 

We’ve even added the links to our earlier articles.  How brave/foolish is that???

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