Coronavirus Moves to Stage 2 – Excuse for Missed Profits

The human cost of the coronavirus cannot be underestimated. Now that the authorities are taking steps to limit further spread, one has to hope that the disease will be restricted from any more major growth. We may well not have hit the peak yet, but hopefully it is in sight. Then there will be a long tail of infections stretching into the spring and summer of 2020.

What will be the long term impacts?

It seems clear that the secrecy and delay of the Chinese government has created a mood-change among the population. What was an acceptance and even pleasure at the Chinese way seems to have turned to resentment and anger. We’ll look at this another day.

But what of the financial impact?

6 month FTSE 100 chart from LSE

From the chart, it is clear that the Boris Bounce post-election has been brought to a halt. However, FTSE 100 remains higher than after the election, and the fall seems to have halted. The market seems to be looking through the inevitable short-term disruption to a resumption of normal service in just a few weeks time.

Coronavirus – a God-send to Failing Managers

Clearly the coronavirus is going to be a blessing to hard-pressed CFO’s wondering how to make excuses for poor financial performance. In the past, the go-to justifications to explain bad management were currency fluctuations or interest rate moves. Bizarrely, these flimsy reasons were accepted by the financial community. Nobody ever seemed to ask why the same CFOs hadn’t managed those risks in the same way that they managed the other risks of the business. Why didn’t they hedge the markets properly?

Then came Brexit, the perfect catch-all reason for management to cover up why they had failed.

And now here is coronavirus, a wonderful reason to show failure was an Act of God, and not incompetence. Has your pie-shop in Hartlepool seen falling sales – blame coronavirus. What if your newsagents in Warrington didn’t sell as many magazines as last year – it’s coronavirus. Do you run a major international oil-company that missed profit targets – coronavirus? Next it will be airlines and iron-ore supply companies saying that reduced demand from China drove then to a loss.

The minimal falls on FTSE 100 says that the market doesn’t believe there will be a long term effect of coronavirus. You shouldn’t believe all those excuses either!

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

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!

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.

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???