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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No U-Turn on Aston Martin (AML) – Yet!

At the time of the Geneva show, we recommended ASTON MARTIN – BUY THE CARS, AVOID THE SHARES. We didn’t buy the shares. Sadly, we weren’t able to buy the cars either. One day, it will be time to brake (break) our recommendation, reverse our view, steer in a new direction and accelerate purchases. Okay, now with the car-puns done, as before, let’s have some pictures before getting to the boring numbers.

Aston Martin Vantage – is it bonus time for me yet? (Ed; NO!)
AM-RB 003 – sold out already!

So to the financials.

AML Financials still look scary

The numbers still don’t look great, (Data from Sharecast.com) with strong growth in revenue required before a decent profit can be made. Turning the numbers around relies on the forthcoming SUV, the DBX, being introduced successfully and selling well. All the industry pointers confirm that this vehicle will sell at great speed and with good margins. However, it is being built in a new factory in Wales (not that the location is desperately relevant, I’m sure that the Welsh have produced outstanding engineering in the past, like, er…. didn’t the Sinclair C5 get built there?) Anyway, the fact is that a new factory producing a new type of car does hold some risks – just ask Elon Musk at Tesla.

AML Share Price since IPO

Here is the share price chart….. not looking like the trend has reversed yet is it? We’ve helpfully added the point where we advised not to buy last time! How modest of us!

Where Next For the Share Price?

Reasons for Up!

  1. Once sales of the DBX SUV fire up, revenues and profits should race away

  2. Autocar has reported that sales of the AM-RB 003 £1 mio hypercar are over-subscribed

 

Reasons for Down!

  1. The trend is firmly downwards – expect it be be oversold before it rebounds

  2. First quarter results confirmed our expectations that new-model investments will eat margins for the foreseeable future

  3. There remains huge delivery risk on the “saviour” SUV project

  4. Market cap remains twice revenue, whereas we would expect it to be closer to a 1:1 ratio

At some point in the future, these shares will be good value. That will be when revenues have grown, new products are selling well or at least have had good launches. Right now, we expect the selling to continue until perhaps 600p.

When we consider investing in AML shares, we find ourselves shaken, not stirred! Steer clear.

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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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Uber-rated, Uber-hyped, Uber-priced.

Lastminute’s post-float price chart not looking so good

Could the Uber float be this bubble’s Lastminute.com?

Anyone who lived through the 1999 tech-stock bubble will remember that the Lastminute.com float in March 2000 was as close to a huge flashing warning light (with 100 dBA klaxons sounding) that the market ever gives.  And for those too young to remember, here is Lastminute’s first-year price chart.

And now we have Uber. A company modestly valued at $90bln. Say it quickly, and it doesn’t sound so huge – but it is $90,000,000,000.00 – for a company that is a neat idea, but has yet to turn a profit.

Yet another Uber Prius

Its core business is a booking app for mini-cab drivers. We are all for making life more efficient, and Uber has first mover advantage, but the barriers to entry are pretty low. Anyone could setup a rival, and many have done so.

So one has to ask, will this core business of ordering a mini-cab ever make any money? There are some clear barriers. In London, a legal ruling has determined that the drivers are employees – and hence are due minimum wages, holiday pay and so on. This is under challenge, but potentially will load a large cost increase on to Uber. And then, if they are employees rather than independent businessmen, suddenly Uber will have to start charging VAT. That’s another 20% on the price. In addition, if all the Uber drivers are employees, will there be so many of them hanging around on the London’s Embankment waiting for your call? My guess is that Uber would work much harder at matching supply to demand – so the quick arrival of your Uber-Prius, may slip back too. Much higher prices and worse service is not a great way to develop a business!

So the core business is looking vulnerable to say the least – unprofitable and with significant extra costs on the horizon.

“Ahh” say the fans, just wait until Uber completes its self-driving technology. Than all the above listed complaints go away (with all the drivers). There are just two small problems with this vision;

  1. Such technology is a very long way into the future. My spies in the industry reckon at least 10 years.

  2. Every motor manufacturer on Earth (except Morgan, perhaps) is working at the same target of offering self-driving cars. So there will be a multitude of offerings, and it is far from clear that Uber will have any kind of first mover advantage.

The investment community is often chastised for being too short-term, and worrying only about the next quarter’s figures. We can be sure that at some point in the next 10 years, the market will lose faith in Uber and the shares will crash and burn – which is a very unfortunate event, especially for a car company.

SWERVE AWAY FROM UBER.

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The Efficient Market Hypothesis is Bunk*

What an irony! The Efficient Market Hypothesis (EMH) famously claims that the prices of all freely traded items include all known information that could affect that price. This means that it is impossible to beat the market…… as all new price movements are the result of random new information. And yet this can only be correct if there are sufficient people out there trying to buy low and sell high – ie, trying to beat the market! So the only way EMH can be true is if sufficient people do not believe in it! For more on EMH, click here.

Warren Buffet, Sage of Omaha

Within investment circles, it has become popular to claim that the fund management industry cannot beat the market – and so investors should just buy an index tracker and save some fees. Whilst it is technically true that Fund Managers incur trading costs, and so on average must perform slightly worse than the market, we believe that the market is not efficient and so there is value to be had. Nobody can dispute that Warren Buffet manages to find value in the market nearly every year.

One only has to examine some of the assumptions of EMH. The most scary is that people are rational automatons. Now I understand that some economists live in a cloistered world, but even they must admit that this assumption is there because it makes the theorising easy, rather than it being a reflection of reality. If anyone believes in “homo-rationalis”, please take a break from whatever you were planning to do today and read Kahneman and Tversky’s Prospect Theory.

Charles Mackay

Done that? Good, so now we are all agreed that people make decisions which are not wholly rational. Perhaps this was stated most clearly by Charles Mackay in his treatise about men going mad in herds.

If you are still not convinced (how can that be?) think of all the investors who make money from trend-following in financial markets. In polite circles this is called ‘Momentum Trading’, or less positively it is known as “The Bigger Fool Theory”. Sharp readers will note that neither of these epithets refer to the underlying value of the security, just the way its market price is moving in a consistent direction. EMH cannot explain market bubbles – from tulip-mania to the tech-bubble to the Great Financial Crash of 2008 to bitcoin, these crashes occurred when investors slowly realised that perhaps values were a bit toppy – and all headed for the door at the same time! If the market was truly rational, nobody would buy bitcoin at all!

And you know what, sooner or later there will be yet another financial meltdown caused by over-optimism meeting cold hard facts……… And EMH will die again!

* Henry Ford is famous – among other things such as starting a car company, and introducing mass production techniques – for saying “History is Bunk”. We don’t agree with that, preferring George Santayana’s “Those who ignore history are condemned to repeat it.”

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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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