Adapt or die, UK election and the Brazilian superstar

Today the UK will have its third election in five years and much is at stake for the UK in terms of political direction and Brexit mandate. Surveys have suggested a firm Conservative majority but the party has slipped in recent surveys so it could get much tighter than currently estimated. The polls close at 22:00 GMT and the earliest results will most likely be announced in the early hours of Friday morning. The UK election is a tough event to trade but in our UK election analysis from two days ago we try to lay out the different outcomes across for GBP and UK equities in addition to expected pivot on fiscal spending etc.

The world has also got its first $2trn market value company as Aramco’s newly floated shares have surged from the IPO price of 32 to 38 in today’s session. In our view the $2trn valuation should be viewed with a grain of salt as only 1.5% of the shares are free floating and they are only listed on the Saudi Stock Exchange. We will know Aramco’s true fair value the day the company lists its shares in a more institutionalized capital market center and the free float goes to at least 10%. Our general view on the global energy sector is still negative with global energy companies only delivering around 7% return on equity which is essentially below the required rate of return for equity investors in the energy sector. In addition the recent OPEC+ cuts are likely not enough to lift oil prices much from here going into 2020.

Staying with our overweight emerging market equities given the macro outlook it’s worth looking at Brazil as the central bank cut the overnight interest rate by 50 bps. (as expected) sending Brazilian equities higher. In our equity update on Monday we highlighted Brazilian equities as a top play based on historical performance during a macro recovery phase. With monetary policy easing, strong manufacturing PMI, stable GDP growth and high beta to the global economic recovery Brazilian equities could easily be a stellar performer in 2020. The key equity index Ibovespa is one of the best performing indices in emerging markets since the bottom in January 2016 up 191% in USD terms. If we look at valuation the Brazilian equity market is valued at around 25% discount to developed market equities.