Stocktake: Markets may play a big role in Brexit vote

Microsoft’s obituaries were premature as it reclaimed its status as the world’s most valuable company for the first time since 2003

Markets are increasingly optimistic the Brexit worst-case scenarios will be averted. Deutsche Bank estimates the odds of a soft Brexit deal to be   50 per cent to 65 per cent. Photograph: Getty Images

Markets are increasingly optimistic the Brexit worst-case scenarios will be averted. Deutsche Bank estimates the odds of a soft Brexit deal to be 50 per cent to 65 per cent. Photograph: Getty Images

 

There was much anguished commentary after Bank of England governor Mark Carney warned sterling could fall up to 25 per cent in the event of a no-deal Brexit. And yet markets remained calm, with the FTSE 100 and sterling ending the day flat. What gives? Carney may have thought his comments would drive a sterling sell-off and that this might cause complacent British politicians to finally sit up and pay attention. Shortly after, however, a global market party had begun following unexpectedly dovish comments from Federal Reserve chief Jerome Powell. Powell’s comments aside, markets are increasingly optimistic the worst-case scenarios will be averted. Deutsche Bank, for example, estimates the odds of a soft Brexit deal to be in the region of 50 to 65 per cent. If Westminster rejects the current Brexit deal, the reasoning goes, markets will sell off, as they did in 2008 when US legislators rejected the initial bank rescue deal. Spooked UK politicians will then follow the lead of their US counterparts in 2008 and vote for a revised soft Brexit package. That’s the hope anyway. The problem, as BNY Mellon cautions, is that if investors expect common sense to prevail, then markets might not sell off in the event of a no vote, resulting in nonchalant politicians not changing their mind in a second vote. In other words, if markets don’t suffer a mini-meltdown, a major meltdown becomes much more likely.

Microsoft’s return to the top

For years, Microsoft was viewed as yesterday’s company, outflanked by rapidly-growing rivals like Apple, Google and Amazon. The obituaries were premature, however, with Microsoft last week reclaiming its status as the world’s most valuable company for the first time since 2003. Now, Microsoft’s ascent to top spot was brief, with Apple soon reclaiming its crown. Furthermore, one could say Apple lost top spot as opposed to Microsoft gaining it; the iPhone-maker is now worth some $850 billion, having lost a quarter of its value during the recent correction. Still, while Apple and fellow fallen trillionaire Amazon have tanked recently, Microsoft stock has held up relatively well, allowing it to sneak its way to top spot. You’ll find many commentators prognosticating as to what’s next – Apple is finished, Apple will rebound, that kind of thing.

Some humility is required, however. At its 1999 peak, Microsoft’s $613 billion market value was roughly 40 times larger than Apple’s. By 2011, Apple had outpaced it; by 2012, it was worth almost twice as much, with Microsoft widely viewed as a corporate has-been.

Now investors are again excited about Microsoft – the stock price has nearly tripled since Satya Nadella became chief executive in 2014, and trades on 25 times 2019 earnings estimates, almost twice as high as Apple’s equivalent as investors fret over an iPhone sales slowdown. Things change. Today’s winners might be tomorrow’s losers. Just ask General Electric shareholders; the most valuable company in the world for five of the six years between 2000 and 2005, the company has since lost almost 90 per cent of its value.

Bearish sentiment augurs well for stocks

The mood has switched from greed to fear and that augurs well for next year.

So says Pension Partners’ Charlie Bilello, who notes a recent American Association of Individual Investors poll was in the bottom 5 per cent of all historical readings. It marks a big shift since January, when bullishness was at levels exceeding 95 per cent of all previous readings. At the time Bilello warned indices tended to slip in the year following extreme readings. Stocks have followed the historical script, with the S&P 500 falling 1.5 per cent. The good news is the data shows extreme bearishness is associated with above-average one-year returns. That’s not always the case – in 2007 bearish sentiment extremes were followed by market carnage. More often than not, however, stocks do much better following extreme fear than extreme greed. “Put simply,” says Bilello, “the odds favour a bounce.”

Trump: ‘I have a gut

“They’re making a mistake because I have a gut, and my gut tells me more sometimes than anybody else’s brain can ever tell me.” Only one man is capable of coming up with a sentence like that – Donald Trump, who continues to lambast the Federal Reserve’s rate-hiking plans. In an incoherent Washington Post interview – “it broke my brain”, tweeted economist Jared Bernstein, a sentiment to which this columnist can relate – Trump complained that he was “not being accommodated by the Fed”, adding he was “not even a little bit happy” with Fed chairman Jerome Powell. Of course, it was Trump who selected Powell instead of reappointing the widely-respected outgoing Fed chairwoman Janet Yellen. Indeed, after interviewing Yellen, Trump was reportedly impressed by her intellect and rate decisions. However, the Post reports, Trump had reservations about her height (Yellen is 5ft 3in), telling several advisers she was too short for the job. Perhaps he should have listened to “anybody else’s brain” rather than going with his gut.

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