Theresa May: too rosy a view of her chances?

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Big Ben London

In the past week, the UK prime minister gained permission from the Commons to call a general election on 8 June. The markets took a dim view, although some of the falls were attributable to the Easter holidays’ geopolitical news.

The equity markets fell across the world on the day May called a snap election (Tuesday) and bond yields also came down. Ben Steinebach Ben Steinebach Head of Investment Strategy

By calling an early election, Theresa May is hoping to lock in her massive lead in the polls and so enjoy a stronger position when embarking on Brexit negotiations with the European Union. However, she is running a real risk that the Remain voters of 23 June 2016 will join forces with regretful non-voters to the benefit of the unabashedly pro-EU Liberal Democrats, in which case a fresh referendum about EU membership might well be on the cards. The outcome would be a highly fragmented political landscape that wouldn’t make negotiations with the EU any easier.

The equity markets fell across the world on the day May called a snap election (Tuesday) and bond yields also came down. Political and geopolitical events over the Easter weekend were partly to blame, with tensions mounting between the United States and North Korea and budget constraints reducing the chances of the Trump administration being able to pull off its whole proposed gamut of tax cuts. When Treasury Secretary Steven Mnuchin said a tax deal was within reach, yields moved back up and equity markets perked up a bit too. US share prices (S&P 500) added over 1% in the week, while Europe’s equity markets lost some ground despite a partial recovery from Wednesday onwards. The UK’s FTSE was the biggest loser at nearly 3%, partly because of a rise in sterling on the back of expectations that a soft Brexit had become more likely with the 8 June elections.

France’s elections dominate yields

Yields edged up in the week, France being the odd one out due to the country’s upcoming presidential elections. Spreads between the French and German markets are moving up and down with every new poll that comes out. As pro-EU Emmanuel Macron looked increasingly likely to claim victory in the first round on 23 April, the week that was saw spreads narrow by over 10 basis points to 60 basis points. It’s not a done deal, though, as Marine Le Pen on the populist right wing is yapping at his heels and Republican François Fillon and left-wing populist Jean Luc Mélenchon are closing in.

If the two populist candidates win this first round, spreads are bounds to shoot up, as this would make a ‘Frexit’ from the EU and the eurozone much more likely. Yields going back up in the rest of the world reflected ebbing geopolitical tensions and Treasury Secretary Mnuchin’s announcement in the United States that a tax-cut agreement with Congress was nearly in the bag.

AEX dips into the red

The AEX index fell by half a per cent in the week and is now at around the 512 mark. The index suffered most of these losses at the start of the week and bounced back as the week wore on. The big gainers included ING, ABN AMRO and Philips, which all added well over 2%. The week’s biggest losers – Shell, SBM Offshore and Ahold Delhaize – each took a clubbing of nearly 4%. The results season really hit its stride in the week just past. And although the US features heavily in the early stages of the results season, there were quite a few Dutch releases to pore over.

The picture so far is quite encouraging. ASML reported solid and better-than-expected quarterly results, and analysts were particularly chuffed that management is predicting an improved outlook. Heineken also produced a robust quarterly update: its excellent first quarter of 2016 made for a pretty challenging comparison and the brewer may be commended for achieving growth at all. Vopak slightly lagged expectations in the market but did beat its own predictions. TomTom’s results were in line with market expectations, with the Automotive division doing particularly well. Arcadis also did better than had been expected. It had been dragged down by disappointing results for a while, but perhaps this quarter has seen it tentatively turn the corner.

Unilever reported higher-than-expected growth and noted that its food activities are growing faster than the markets in which it operates. And lastly, Akzo Nobel returned figures ahead of expectations, although the focus was firmly on its new strategy. Much as expected, it raised its cost savings objectives and set out ambitious targets for its operational margin. More surprisingly, it promised to pay to shareholders the bigger proportion of its demerger of the Specialty Chemicals division. If it persists in its courtship of Akzo, PPG will be compelled to raise its offer in the wake of this new strategy.

Elsewhere in Europe, Nestlé and ABB reported better-than-expected figures and Danone raised its outlook for full 2017. In the US, the banking majors came in ahead of forecasts, Goldman Sachs being the odd one out. Although many companies beat expectations, IBM trailed projections while Netflix shares fell on a disappointing outlook.

Results season taking off

Once again, confidence indicators will set the macroeconomic stage in the week ahead, as many countries are due to release fresh figures for consumer and business confidence in April. The United States is looking forward to consumer confidence figures from both the Conference Board and the University of Michigan. Meanwhile, the EU is gearing up for the release of its economic sentiment indicator, combining consumer and business confidence. And in Germany, the leading Ifo index for business confidence is eagerly awaited.

In addition, quite a few countries are scheduled to release new inflation figures, fresh estimates of first-quarter economic growth and consumer spending numbers. The ECB will meet to discuss interest rate policies but we expect no policy changes. The Bank of Japan is set to discuss both interest rate changes and the latest economic prospects. A great many companies are slated to post their results this coming week, including KPN, Philips and Randstad in the Netherlands. A selection of international corporations whose figures are due out: Google, Coca-Cola, McDonalds, Credit Suisse, Procter & Gamble, Boeing, Amgen, Baidu, Intel, Total, Sanofi, General Motors, and Exxon Mobil.

Philips will report its figures on Monday. Markets are looking for organic sales growth of 1.9%, margins improved to 7.5% and operational profits of EUR 425 million, with the Personal Health division notching up the biggest growth. Any news on the investigations by the US regulator is also eagerly awaited.

Markets predict a good quarter for Randstad, with organic revenue growth of 5.5% and double-digit operating earnings growth. Europe is expected to be particularly robust, North America fair. Google is reckoned to be able to notch up double-digit growth, even if usage is changing – i.e. more searches from mobile phones rather than desktops. In addition, YouTube and Google Play should increasingly contribute to results.

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