ECONOMICS Scotland: St. Andrews cross remains part of the Union Jack

David A. Meier, Economic Research, Julius Baer - Viernes, 19 de Septiembre

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Financial markets are clearly relieved this morning after hearing that the Scottish electorate declined the independence referendum, with a clear result of 55.4% ‘no’ votes at the time of writing (95.5% of votes counted out). The outcome seems more decisive than presumed, attributable to rather discrete no-sayers, whereas the ‘yes’ camp was more visible in the media coverage of yesterday’s vote. It seems that the wide array of open questions with regard to practical issues of separation outweighed the desire for independence. Meanwhile, financial markets are relieved that they do not have to face months of uncertainties and the risks of an uncontrolled break-up. As a first reaction the pound is on a relief rally. Nevertheless, the independence movement has paved the path for reforms in the UK, after Prime Minister Cameron signalled to reduce the influence of the Palace of Westminster and hand over more autonomy to the regions. This could indeed pave the path for stability going forward, but it remains to be seen over the next few years whether it can fully remove the uncertainties about the UK’s political future.

Scotland’s ‘nay’ sends the sterling on a relief rally, which will however only be short-lived due to pound overvaluation. The vote and accommodation signalled from Lon-don offer relief to the markets, but do not remove fully the uncertainties about the UK’s political future.

 

Christoph Riniker, Head of Strategy Research, Julius Baer

 

STRATEGY

Scotland from an equity perspective

Scotland has finally decided to stay in the UK. By and large almost everything remains unchanged, at least from an equity market perspective. We therefore see no reason to change our cautious medium-term outlook for the market. Yes, there could be some relief in todays session given that a good part of the uncertainty has disappeared − but only in the short term. Especially names with a large Scottish exposure which suffered ahead of the vote might benefit. However, there remain a number of negative factors for the equity market, such as the British pound which has rallied in recent hours. Given the international exposure of the UK equity market this should provide further headwinds to the market based on the correlation shown in the chart.

 

Scotland’s decision to stay in the UK might cause some relief trades today. Over the medium term we keep our negative stance on the UK equity market.

 

 

Heinz Rüttimann, Strategy Research, Julius Baer

 

Emerging markets – risk of US rate hikes

The Fed’s interest rate policy is of great importance to emerging markets with a large and deteriorating current account deficit such as Turkey, South Africa but also Brazil. Since Brazil and Mexico trade largely in the same time zones as the US a, it was interesting to follow their stock market’s intraday price development. To recall, Brazil’s current account deficit has been deteriorating over the last 18 months from -2.4% of GDP to -3.8% of GDP. Mexico’s current account deficit, on the other hand, has been stable at -1.2% of GDP. Intraday the Brazilian index (Ibovespa) was first up by 1.5% only to fall back to opening levels after the Fed’s announcement. The Mexican index (IPC) on the other hand opened 0.4% higher and closed the day at the same level.

 

The Brazilian market is more vulnerable to US interest rate hikes. Going into 2015 the strategy in emerging markets must be to focus on countries that actively embrace reforms and are less vulnerable to the US interest rate cycle.

 

 

Markus Allenspach, Head of Fixed Income Research, Julius Baer

 

FIXED INCOME

Bond markets face some headwinds

Government bond markets mainly closed lower yesterday. The market is still digesting the words of Fed Chair Janet Yellen. Al-though our impression was that Yellen tried hard to disburse fears of rapid interest hikes, yields have been moving higher since her press conference. The negative sentiment was supported by the release of the Fed’s quarterly ‘financial accounts of the USA’ report yesterday. As the figures show, households are building up debt again. Consumer credit rose at an annual rate of 8.1% in the second quarter, and debt of non-financial corporates increased by 6.3%, after 6.2% in the previous quarter. It is a source of instability when debt rises faster than GDP, according to studies by the Bank for International Settlements and the International Monetary Fund. Mortgage debt remains the only laggard, with an increase of 0.4% only. A fast accumulation of debt is certainly increasing pressure on the Fed to normalise rates even without having achieved full employment.

 

We stick to our view that interest rates will only increase in mid-2015. The exit de-bate, however, will weigh on the riskier segments of the bond market. It is therefore much too early to return to the US high-yield bond segment.

 

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