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UK Weekly Commentary

BlackRock |07-Jan-2019

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UK weekly commentary from BlackRock covering week highlights, what we’re thinking about the markets and what your clients may be asking this week.

Week past - highlights Week ahead – highlights

 


Taking your pulse

Question: What are your top predictions for the year ahead in the UK?

You said:

UK weekly commentary chart

Source: BlackRock, January 2019

BlackRock Investment Institute: “Crunch time looms for Brexit. The UK parliament remained deadlocked in mid-December, making the odds of Prime Minister Theresa May’s deal passing in its existing form very low. A change of path is likely necessary, but it is unclear which direction this might take. A second referendum may be required to break the deadlock, although May appears to be hoping fears of a new referendum or a disruptive no-deal scenario may be enough to win support for some amended version of her withdrawal deal closer to the final hour. Many potential paths for UK politics require significant time to play out, likely compelling an extension of Article 50. We believe the European Council would only be open to an extension if it paves the way for a “soft Brexit” or an outright cancellation of Brexit. We still assign a low probability for a “no-deal” Brexit as we expect the UK parliament would ultimately vote against it, although the valuation of sterling appears to reflect significant fears of a disruptive exit. There is also a growing possibility that an election may be required in order to break the impasse in Parliament, a prospect which may also be depressing sterling.”

What we think

Kate Moore, chief equity strategist on the year ahead

“In 2019, we’re talking about a slowdown in the pace of economic growth, not an end to the expansion. In fact, we see the global economic expansion continuing not just through 2019, but into 2020. It is also important to note that at the beginning of 2018 we were featuring a view of sustained and synchronised growth, but in the year ahead, we expect the growth rates of different regions and countries to vary meaningfully. This has implications for risk assets globally. There will be a slowdown in the pace of economic growth, but again, not an end to sustained earnings expectation.

“In a world where growth is slowing down, but still expanding, and earnings growth is going to be slower. Investors need to be much more differentiated and tactical than they were earlier in the cycle. This leads to opportunities in different regions and sectors. Our two favoured regions based on economic growth and earnings growth are the US and emerging markets, led by China.”

Week past

Equities concluded a dismal year with the majority of markets in the red. It was the worst performance since the height of the financial crisis as investors adjusted to an era of tighter monetary conditions and slower economic growth.1

Retail consultancy springboard painted a gloomy picture of the all-important Christmas season on the High Street. It showed a 3% decline in footfall compared with last year. In-store shopper numbers on Boxing Day fell by 3.1% year on year.2

Weakness in the housing market was reflected in gross mortgage lending, which dipped 2% from November 2017 to November 2018. The number of mortgages approved by the main high street banks in November was 10.6% lower over the same period.3 

US jobless figures continued to show strength, with the number of Americans filing for benefits falling to 216,000. This is only just above the 49-year low of 202,000 registered in September.4

China manufacturing and non-manufacturing purchasing managers index (PMI) – Chinese manufacturing headed back into contraction territory as the threat of a prolonged trade war dampened sentiment and companies increasing turned elsewhere for low-cost manufacturing. The manufacturing PMI dropped to 49.4 in December, the weakest since early 2016 and below the 50 level that denotes contraction.5

1Stocks end the year down, suffering worst decline since 2008, CBS News, December 2018
2Retailers suffer 3% drop in footfall as Christmas woes persist, The Guardian, December 2018
3Weekly jobless claims, CNBC, December 2018
4Mortgage lending drops 2%, FT Adviser, December 2018
5China slowdown continues with factor gauge down to 2016 level, Bloomberg, December 2018

Week ahead

UK Manufacturing, construction and services PMIs – The UK’s economy has been relatively steady, but the Brexit deadline is looming and confidence figures have been falling. Nevertheless, the market expects all three PMI indicators to rise and to continue in expansion territory.6

US manufacturing – The figures are expected to fall on the back of the US/China trade frictions. Nevertheless, they are likely to show continued strong expansion for the US manufacturing sector as the effect of Trump’s tax cuts works its way through the system.6

US non-farm payrolls – the current expectations are for around 180,000 jobs to have been created, up from 155,000 last month, with the unemployment rate holding steady at 3.7%. There is also likely to be small amounts of wage growth.6

Eurozone retail sales – It has been a difficult period for the Eurozone economy and retail sales figures over the all-important Christmas season will provide some insight for the year ahead. A raft of confidence surveys will also give the temperature of the Euro area.7

6Week Ahead, IG Index, January 2019
7Economic calendar, Financial Times, January 2019

The opinions expressed are as of December 2018 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative only.

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