Stephen Cox • 22 Mar 2016

Investment Outlook March 2016

UK Prime Minister, David Cameron negotiated favourable European Union membership terms at the EU Summit on the 18th February which protects the Sterling Pound, limits immigration benefits, reduces bureaucracy and should lead to a closer Union. Directly after this summit, Mr. Cameron set the date for the BREXIT referendum for the 23rd of June and he maintains his support to stay within the EU. The biggest development in the ongoing BREXIT saga is that the Mayor of London, Boris Johnson has declared his support for the “Out” campaign; claiming the UK could negotiate better membership terms if the public first voted to leave the EU. His announcement immediately weakened the Sterling Pound (GBP), and led to Cable (GBPUSD) closing below $1.40 on a monthly basis for the first time since 1984, while EURGBP continues to grind higher and is now trading 79p, a 13% appreciation in the past 3 months. Mr. Johnson is not alone in his view to leave the EU, in total 150 of 331 Conservative MPs are voting in favour of a BREXIT. We still think the economic costs of the UK voting to leave the EU outweighs any potential benefits. There is extreme uncertainty associated with a BREXIT and negative factors include a potential loss of foreign direct investment, a potential relocation of large investment banks out of the City of London, a collapse in the value of the Sterling Pound, more expensive funding for the UK Government within the primary debt markets to fund its current account deficit, potentially another referendum on Scottish Independence, a loss of jobs and a slowdown in economic growth. There is also a risk of a cut to its sovereign credit rating from the 3 big rating agencies, impacting UK business confidence and curtail investment spending. If the UK did vote to leave it would have to renegotiate trade relations with the EU and other countries and regions, as well as reconsider other topics such as regulatory and immigration policies. The impact of a BREXIT on the strength of the Sterling Pound is extremely binary. An “In” vote should lead to a strong recovery, while an “Out” vote will drive GBP further into uncharted territory which it hasn’t seen for several decades.

The first estimate of March composite Eurozone PMI is expected to edge up to 53.2 (previous 53.0). Additionally both manufacturing and services confidence should improve, albeit following a relatively weak start to the year.

The 3rd estimate of Q4 GDP for the US is expected to print unchanged at 1%, with some modest upward revisions expected for key components such as real consumption growth and net exports.

We believe equities will grind higher this week given the exceptionally accommodative stance of both the ECB through its expanded QE programme, and the Federal Reserve. The US Fed toned down its rate hiking outlook last Wednesday, from 4 separate 25bps rate hikes in 2016 to only 2 hikes. The Fed revised down its growth and inflation outlook, and policy decisions remain data dependent.

This new dovish outlook weighed heavily on the USD, which trading higher against the euro to $1.13 from $1.11; which in turn supported oil prices and US equities, leaving the latter higher on the year on a weekly closing basis for the first time in 2016.

Stephen Cox

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