Stocktake: Investors nonchalant about Brexit threat?

The prospect of Brexit may be nightmarish to many but one could be forgiven for thinking investors appear oddly sanguine.

The FTSE has slipped in 2016 but it has nevertheless been one of the top-performing European markets, so much so that UK companies now trade at a bigger premium to their Stoxx Europe 600 counterparts than at any time over the last decade, according to Bloomberg data. Furthermore, short sellers have trimmed bets against UK stocks since February’s referendum announcement.

This seeming nonchalance may be misleading. The resource-heavy FTSE has outperformed due to the strong recovery in energy and commodity stocks, but a JPMorgan index comprising of firms deemed to be at risk has plunged, while sterling last week hit 28-month lows.

In truth, it’s very difficult to calculate the impact of Brexit uncertainty on share prices. That JPMorgan index, for instance, is dominated by financials, and financial firms throughout Europe have been battered in 2016.

Binary commentary – ‘If X happens, Y will follow’ – makes for a nice narrative but disentangling Brexit from the myriad of other factors influencing shares is trickier than it looks.

Taxing times at Pfizer/Allergan

StockTake is shocked – shocked! – that the United States government took such a dim view of Pfizer's proposed $160 billion merger with Allergan, aborted last week following new rules aimed at preventing tax inversions.

The move would have allowed Pfizer to be domiciled in Ireland, thereby slashing its tax bill, although that barely crossed the mind of Pfizer chief executive Ian Read. "This deal is not just about tax benefits," Read protested last November. "This is about great franchises." Read was "excited" about the "really strategic deal" involving two "established" and "innovative" businesses, and would "still try to do the deal" if the tax benefits weren't there. Stunned by the portrayal of the deal as one big tax dodge, he said he "cannot comprehend why it's not being applauded by the political class".

The political class were not alone in their disapproval, Financial Times columnist Michael Skapinker last week condemning Read for attempting deals “that had little to do with the quality of his company’s products or the needs of its customers”.

Cynics, the lot of them.

Apocalypse now again

Corporate profits are suffering a "gut-wrenching slump", the economic cycle is "withering and writhing" and a "tidal wave of corporate default" is coming, says Société Générale permabear Albert Edwards, who last week warned US recession was "virtually inevitable".

Edwards is a colourful character who produces gloriously readable notes, but his warnings of “inevitable” carnage are nothing if not familiar.

In 2010, he warned markets couldn’t escape an “inevitable denouement”; an S&P plunge to 400 is “almost inevitable”, he said in 2011 (it’s now above 2,000); 2012 brought warnings of China’s “almost inevitable” hard landing, while 2014’s warning that profit declines are “inevitably followed by recession shortly thereafter” echoes last week’s apocalyptic utterances.

‘Inevitable’ means ‘certain to happen, unavoidable’. Still, the financial world would be a poorer place without Edwards’s notes, which are – inevitably – a touch hyperbolic.

Predictions at a crossroads

Albert Edwards is not the only bear given to repetition. Many have been uttering the same warnings since the bull market began in 2009, prompting Michael Batnick of Ritholtz Asset Management to compile a list of phrases that are reliable indicators of someone best ignored. My favourites: "We're in the ___ inning"; "We're at a crossroads"; "Something has to give"; "1929"; "Too far, too fast"; "Eventually, the chickens will come home to roost"; "The canary in the coal mine is ___"; "Never in my lifetime"; "But what about Japan?"; "Manipulation"; "The contrarian in me"; "Cross-currents"; "The real unemployment rate"; "The Fed is misunderstanding ___"; "Like I said last ___"; "Cash is king"; "Uncertainty"; "What people fail to realise"; "1987". Here's another one for the list: "Inevitable."

New low for active managers

Index funds are fine in a bull market, we’re often told, but you need a skilled active manager to steer you through troubled markets. Unfortunately, that theory didn’t quite hold up in the first quarter – just 19 per cent of US equity funds beat their benchmark, Merrill Lynch noted last week, the worst performance since their records began in 1998.

Even before costs are deducted, the average fund underperformed benchmarks by a record 1.9 percentage points during the first quarter. Funds’ 10 most popular stocks underperformed the 10 most unloved stocks by almost 7 percentage points, said Merrill, while separate Goldman Sachs data shows the 50 most popular stocks declined 3.1 per cent in 2016; the least popular gained 5.3 per cent.

As usual, many explanations are being proffered by fund managers, but what it comes down to is that instead of outmanoeuvring a panicked market, they ended up in the wrong stocks and the wrong sectors at the wrong time – again.