The odds of a UK exit from the European Union are falling, according to betting markets. Furthermore, the UK’s return on equity (ROE) is now at its lowest point level in the past 40 years, even below the nadir in the 1974-1975 recession that forced the British government to seek an IMF bailout. At MRB we are upbeat on prospects ahead:
- The potential disruption to the UK economy and the rest of Europe, should the exit side win, plus the contagion this would cause in the global financial system, has been hanging over financial markets, and in particular, sterling.
- Regardless of the arguments over whether the UK and euro area would be better off with Brexit, the removal of uncertainty eases investor concerns about global growth and is positive for risk assets.
- The decline in UK return on equity reflects a number of factors, including the collapse of ROE in resource sectors, which accounted for one-third of earnings as recently as four years ago.
- It is almost always profitable in the long run to buy equities when earnings are at an historically depressed level. UK earnings would need to rise by 70% to restore the ROE to its historical average.
- A catalyst for change in the UK profit cycle is not yet evident, but the removal of the Brexit threat and a continuation of the global economic recovery suggest it could emerge not far down the road.
Source: www.mrbpartners.com
MRB – The Macro Research Board (www.mrbpartners.com) is a partner-owned independent research firm, recognized as one of the world’s leading providers of well-researched and actionable theme-based macro strategy and investment ideas.