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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Hurray! Today’s D-Day, The Day for Data Day

Who could fail to be excited by the monthly US Non-Farm Payroll Data Release at 1.30pm London time? The US economy has done well this year, despite bad weather and doom-mongering economists reacting to Mr Trump’s sanctions and tariffs. For Q1 2019, growth was 3.2% (calm down, that’s an annualised figure – the Americans like to make the figures look as large as possible)

Dollars make the world go round
Yes, it is NON-Farm Payrolls, but we like tractor pictures

We are slightly more positive than consensus, forecasting 220,000 for Non-Farm Payrolls – though any number north of 175,000 will not disrupt our view that the US economy is doing fine, and will help stabilise recession worries across Europe. Expect US unemployment to stay near 3.8% and wages to tick up at a nice rate just over 3.0%.

Meanwhile, in Europe, growth has stayed positive, with a 0.4% growth for Q1.

Mark Carney – branded an unreliable boyfriend

And so we come to Mr Carney. The Bank of England’s Governor has been at it again, this time telling the market that they are too pessimistic about rate rises. Like the rest of the City, we think he is working his “unreliable boyfriend” act again. Inflation is under 2.0%, unemployment is below 4.0% and wages are rising at 3.5%. Everything is cool, and rate rises are unthinkable before Brexit. After that, it will all depend on the data.

My former boss always claimed that “if you can’t measure it, you can’t manage it.” I presume he is now enjoying his retirement, busy counting and measuring his stack of cash.  But I bet he still watches the data to see how the economy is doing.

The good news is, we are truly enjoying a Goldilocks economy, growing at just the right rate and ignoring the idiotic, pathetic dramas being played out in Westminster and Washington.

Be happy, and enjoy your long bank holiday weekend!

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