Weekly Market Update – 17 February 2020

UK ECONOMIC OUTPUT

The Office for National Statistics estimates that the UK economy expanded by 1.4% in 2019 compared with 1.3% in 2018. That’s not bad, all things considered.

Indeed, if the UK was going to dip into a Brexit-inspired recession,  we reckon it would have done so during the second half of last year. And, thanks to figures released last week, we now know with a reasonable degree of certainty that didn’t happen.

The initial estimate for growth during the fourth quarter suggests that output was flat. Of course, that’s just the initial estimate and future updates might tip a zero into a negative but to get two consecutive quarterly contractions we’d need to see either a huge revision to growth in the third quarter – during which GDP rose a full 0.5% on the latest figures – or subsequent negative growth during the current quarterly period.

Now, we might be prepared to countenance a revision in the order of 0.5% between an ‘initial’ estimate for GDP made on the basis of patchy available data and a full ‘final’ estimate in any one quarter, but we’re guessing it would take something structural (a wholesale change in accounting methods for example) to move what is now a reasonably comprehensive calculation in the case of Q3 2019.

That leaves us with the potential for negative growth in the first quarter of this year. That, again, seems unlikely. Alongside the quarterly numbers, the ONS also released their estimate for growth during the month of December. December saw an increase of 0.3% with growth right across the economy barring agriculture. Services were up 0.3%, production was up 0.1%, manufacturing was up 0.3% and construction was up 0.4%. Added to a rebound in activity following months of parliamentary paralysis we suspect we’ll also bear witness to increased government spending and to an uptick in business investment.

We’re not forecasting a spectacular increase in Q1, but we are far from forecasting a negative rate. As it stands 0.3% feels about right to us.

The consensus calls for growth for the full year to come in at something like 1.3%. Similarly, the consensus calls for inflation of something like 1.6%. Add those together and we are looking at nominal growth in the region of 3.0%. Unfortunately, that’s some way short of what we consider to be the 4-to-5 percent ‘sweet spot’ for stocks. And there are risks to the downside; we don’t, for instance, know what kind of deal we might get with the EU and we don’t know whether the recent tentative improved outlook for global manufacturing will survive the coronavirus.

Nevertheless, given anything like a reasonable timeframe, we’re still bullish on the prospects for the domestic stock market, particularly so for mid- and smaller-sized companies.

GERMANY POLITICS

Last week Annegret Kramp-Karrenbauer (AKK) quit her post as Angela Merkel’s successor and leader of the Christian Democrats (CDU/CSU). That leaves the outlook for German politics even more uncertain than it was. Assuming the CDU/CSU can hold on to power, AKK represented the promise of continuity when Angela Merkel steps down at the next federal election (likely between August and October next year).

Now a four-way leadership battle begins between Jens Spahn, Friedrich Merz, Markus Soder and Armin Laschet. All of this matters because, while that battle rages, it is likely to impose the kind of paralysis over there that we saw over here.

Purely from a valuation point of view, German stocks still look attractive, but it looks like we’ll have to be patient to see them outperform.

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