June 23rd 2016 – Ring any bells? For those cheering for a Brexit the date is etched in stone and of equivalent importance to that of 1966 to all English Football followers. The latter will know all too well just how painful it feels to achieve a great victory only then to spend the next decade or five waiting for the next victory to come along. If someone had said in 1966 that it would be another 52years+ before England would look like standing another chance of winning the World cup, they would have been laughed at. Almost 2 years on after Brexit and you can almost feel the frustrations beginning to boil. After the initial stunned responses from all parties involved, the EU and UK locked horns in a battle over terms and details. It’s complicated. Don’t get me wrong. This is no easy feat. But lets get real here. The Conservative government has had almost 2 years to arrive at a customs / trade agreement and as yet, all appear clueless. In a world dominated by digital media and virtual ‘borders’ one would think a solution would be as easy as a few clicks of a mouse. A decent facial recognition system that can scan through a few balaclavas would also not go a miss. TheShareHub mentioned a few months ago that it felt like all involved were dragging their feet… delaying the inevitable in the hope that public sentiment may change in favour of remaining or better described as a ‘Soft Brexit’. It looks like a Brexit, waddles like a Brexit, quacks like a Brexit… but is actually a few EU regs away from being a ‘REMAIN’. At present, the writing looks like it’s on the wall… and any timeframe agreed 1 year ago looks like slipping into 2020. There are even some experts out there citing 2026 as being a potential clear break point. That’s only another 2 world cups away… so you never know, England’s football team may well hold the Golden globe above their heads before Brexit finally happens. The chances of either happening before March 2019 looks highly unlikely. In the meantime, the UK economy slows to almost zero. The all important UK property market dropped by 3% in April against a -0.3% expectation. It was a shocker and carefully played down by all media sponsored outlets. Blame it on the beast from the east? Well, considering March, April and May are supposed to be the strongest periods for the UK housing market, it doesn’t bode well for the quieter months come July, Aug and Sept. Added to this, the woeful weather also took the blame for a 3%+ drop in retail sales. UK commuters will know the danger of a few leaves on the tracks, but who would have thought a few snow flakes would have turned Mr Carney’s BoE rate cut plans to slush? Whilst the weather has not helped, the real ‘beast from the east’ is indeed the EU. The dangers of protracted Brexit discussions are now being broadly felt across the UK and the EU. Uncertainty is a killer of sentiment. Unless some clarity begins to appear, it’s just going to get worse and that ultimately means more QE and a return to rate cuts rather than rate increases. The recent ‘kicking the hornets nest’ by the US in the MENA region has brought with it more uncertainty across the globe but also higher commodity prices which in turn cause higher inflation concerns. OPEC have been kind. Between OPEC and Russia, they have carefully rebalanced the world’s supply against demand over a 3 year period giving countries/governments across the globe an opportunity to grow out of a recession. But lets not forget where PoO was and where it is today. PoO (Brent) was trading at $105pb just 4 years ago. Today, Brent is trading close to $79pb. Even at $90pb, it’s still a decent 15% shy from 2014 levels and that’s against growing global demand. The worst may be yet to come. Whilst US shale is able to scale up swiftly, it is also fast to decline. It might just keep coming or it could hit a patch whereby replenishing supply takes a little longer. The certainty of delayed projects and limited supplies is more apparent across NON OPEC supplies. The North Sea as well as many other areas across the globe have seen development projects shelved. It could take years before significant new production streams hit the market. All points to higher Crude/Brent prices in 2018 and this will either be compounded by Iranian sanctions or alleviated by higher Saudi/Russian production. One thing is sure… PoO is being nicely polished ahead of the Saudi Aramco IPO. After Trump’s recent helpful actions, it would not surprise me one bit to see the Saudi’s appoint Goldman Sachs/BoA and co as the leading book runners for the world’s largest IPO. The commissions alone in handling a deal like this dwarf any normal market action in any given year. I suspect the LSE will benefit too but assuming the above, it is likely to be peanuts compared to the US companies. Plenty of ‘back scratching’ going on out there at present and to his credit, Mr Trump is making UK and EU look a bit like naive kids at their first day at school. If the UK and EU are going to get anywhere fast over the next decade, it will be by working with each other… the sooner the better.
Week 19 Review:
Strong recoveries continue across the newspaper picks as the bluechips get hauled up with the algo bots chasing the FTSE higher off the back of strong commodities. The latter is due a breather but assuming there is a continued switch out of retail sectors/banking etc, it’s likely to see some solid support over the next few months as commodities keep the FTSE 100 unseasonably high. Sell in May? In 2018… No way! TheShareHub top ten picks lead the way although frustratingly held back by some slow progress (in share price terms) from HUM, SOLG, and CERP. All are lagging despite great updates, so one would assume these should outperform or consolidate well if or when a commodity ‘breather’ comes along. Unfortunately for Serica, having assets co-owned by Iran is not ideal but looks like worst case scenario is already priced in. I would expect CERP, SOLG and HUM to be the biggest movers over the next quarter. PetroMatad (MATD) as part of the 2018 ‘heads up’ calls should also spring into life as the long awaited summer blockbuster exploration drill plan gets underway. Roughly 6 weeks left to get tickets booked – cheap seats still going for that show. Usual risks apply – see the risk warnings in sidebar.